LJ INTERNATIONAL INC, 424B3, 1998-10-20

LJ INTERNATIONAL INC
424B3, 1998-10-20
JEWELRY, PRECIOUS METAL

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FILED PURSUANT TO RULE 424(b)(3)

REGISTRATION NO. 333-07912

PROSPECTUS

LJ INTERNATIONAL INC.
1,679,000 WARRANTS TO PURCHASE
1,679,000 SHARES OF COMMON STOCK
AND
1,679,000 SHARES OF COMMON STOCK
UPON EXERCISE OF THE WARRANTS

As a part of the initial public offering of LJ International Inc. (the
"Company") completed in April 1998, the Company registered with the U.S.
Securities and Exchange Commission (the "Commission") and sold 1,679,000 shares
of common stock, $.01 par value per share (the "Common Stock") and 1,679,000
Redeemable Warrants to purchase 1,679,000 shares of Common Stock (the
"Warrants"). Each Warrant entitles the holder thereof to purchase one share of
Common Stock at $5.75 per share until April 15, 2003. The Warrants are subject
to redemption by the Company at $0.25 per Warrant on 30 days' prior written
notice, provided that the closing price of the shares of Common Stock shall have
been at least $10.00 for thirty (30) consecutive trading days ending ten days
prior to the notice of redemption and provided there is then a current effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), covering the shares of Common Stock issuable upon exercise of
the Warrants. The Warrants are not redeemable prior to April 15, 1999 without
the written consent of Barron Chase Securities, Inc. (the "Underwriter"). As of
September 28, 1998, all 1,679,000 Warrants were outstanding. See "Description of
Securities."

In addition to the foregoing 1,679,000 Warrants and 1,679,000 shares of
Common Stock, this Prospectus covers the sale of 292,000 shares of Common Stock
underlying the following securities which the Company sold to the Underwriter
and/or persons related to the Underwriter: (i) stock purchase options (the
"Common Stock Underwriter Warrants") to purchase up to 146,000 shares of Common
Stock at an exercise price of $8.25 per share, exercisable during the five-year
period commencing on April 15, 1998 (the "Effective Date"); and (ii) warrant
purchase options (the "Warrant Underwriter Warrants") to purchase up to 146,000
warrants (the "Underwriter Underlying Warrants") at an exercise price of $.20625
per warrant exercisable during the five-year period commencing on the Effective
Date, each of which Underwriter Underlying Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $8.25 per share,
exercisable during the five-year period commencing on the Effective Date. The
Common Stock Underwriter Warrants, the Warrant Underwriter Warrants, and the
Underwriter Underlying Warrants are sometimes collectively referred to in this
Prospectus as the "Underwriter Warrants." As of September 28, 1998, all of the
Underwriter Warrants were outstanding. See "Description of Securities."

The Common Stock covered by this Prospectus which is issuable upon exercise
of the Underwriter Warrants is to be sold from time to time by or for the
account of certain selling shareholders. See "Selling Shareholders" for certain
information concerning such persons. None of the proceeds from the sale of the
Underwriter Warrants and underlying Common Stock will be received by the
Company.

No minimum number of Warrants must be exercised, and all funds received by
the Company upon exercise of the Warrants and the Underwriter Warrants will be
used for general corporate purposes.

FOR INFORMATION CONCERNING CERTAIN RISKS RELATED TO THIS OFFERING, SEE "RISK
FACTORS" ON PAGE 8.

The Common Stock and the Warrants are traded on The Nasdaq National Market
under the symbols "JADEF" and "JADWF," respectively. On September 23, 1998, the
last sale prices for the Common Stock and the Warrants, respectively, were $4.75
per share of Common Stock and $1.125 per Warrant.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS COMPANY(1)
Per share of Common Stock (on exercise of Warrants)(2)... US$5.75 US$0.00 US$5.75
Total.................................................... US$9,654,250 US$0.00 US$9,654,250
</TABLE>

(1) Before deducting estimated total expenses of this offering of approximately
US$32,000 payable by the Company.

(2) Does not include 292,000 shares of Common Stock registered for the account
of selling shareholders to be offered from time to time in the market. See
"Selling Shareholders."

LJ INTERNATIONAL INC.
UNIT #12, 12/F, BLOCK A
FOCAL INDUSTRIAL CENTER
21 MAN LOK STREET
HUNG HOM, KOWLOON, HONG KONG

THE DATE OF THIS PROSPECTUS IS OCTOBER 13, 1998
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ENFORCEABILITY OF CIVIL LIABILITIES AND CERTAIN
FOREIGN ISSUER CONSIDERATIONS

The Company is a British Virgin Islands ("BVI") holding company, and all
or a substantial portion of the assets of the Company and its subsidiaries
are located in the People's Republic of China (the "PRC" or "China") and/or
Hong Kong. In addition, all of the directors and officers of the Company
except Jeffrey W. Taraschi and Lionel C. Wang are non-residents of the United
States, and all or a substantial portion of the assets of such non-residents
are located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon such
non-residents or to enforce against them judgments obtained in United States
courts, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof. There is
uncertainty as to whether courts of China, the British Virgin Islands or Hong
Kong, respectively, would enforce (i) judgments of United States courts
obtained against the Company or such non-residents predicated on the civil
liability provisions of the securities laws of the United States or any state
thereof or (ii) in original actions brought in China, the British Virgin
Islands or Hong Kong, liabilities against the Company or such non-residents
predicated upon the securities laws of the United States or any state
thereof. The Company has designated CT Corporation System, 1633 Broadway,
New York, New York 10019, as its agent for service of process in the United
States with respect to this Offering.

There are no treaties between China and the United States, between the
British Virgin Islands and the United States nor between Hong Kong and the
United States, respectively, providing for the reciprocal enforcement of
foreign judgments. However, the courts of China, the British Virgin Islands
and Hong Kong may accept a foreign judgment as evidence of a debt due. An
action may be commenced in China, the British Virgin Islands or Hong Kong for
recovery of this debt. However, a Chinese, British Virgin Islands or Hong
Kong court will only accept a foreign judgment as evidence of a debt due, if:
(i) the judgment is for a liquidated amount in a civil matter; (ii) the
judgment is final and conclusive and has not been stayed or satisfied in
full; (iii) the judgment is not directly or indirectly for the payment of
foreign taxes, penalties, fines or charges of a like nature (in this regard,
a Chinese, British Virgin Islands or Hong Kong court is unlikely to accept a
judgment of an amount obtained by doubling, trebling or otherwise multiplying
a sum assessed as compensation for the loss or damages sustained by the
person in whose favor the judgment was given); (iv) the judgment was not
obtained by actual or constructive fraud or duress; (v) the foreign court has
taken jurisdiction on grounds that are recognized by the private
international law rules in China as to conflict of laws in China or common
law rules as to conflict of laws in the British Virgin Islands or Hong Kong;
(vi) the proceedings in which the judgment was obtained were not contrary to
natural justice (i.e., the concept of fair adjudication); (vii) the
proceedings in which the judgment was obtained, the judgment itself and the
enforcement of the judgment are not contrary to the public policy of China,
the British Virgin Islands or Hong Kong; (viii) the person against whom the
judgment is given is subject to the jurisdiction of the Chinese, the British
Virgin Islands or the Hong Kong courts; and (ix) the judgment is not on a
claim for contribution in respect of damages awarded by a judgment that does
not satisfy the foregoing. Enforcement of a foreign judgment in China, the
British Virgin Islands or Hong Kong also may be limited or otherwise affected
by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or
similar laws relating to or affecting creditors' rights generally and will be
subject to a statutory limitation of time within which proceedings may be
brought.

Under United States law, majority and controlling shareholders generally
have certain "fiduciary" responsibilities to minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders that are obviously unreasonable may be declared null and void.
While the

<PAGE>

Company believes there are no material differences between the protection
afforded to minority shareholders of a company organized as an International
Business Company under the law of the British Virgin Islands from those
generally available to shareholders of corporations organized in the United
States, there may be circumstances where the British Virgin Islands law
protecting the interests of minority shareholders may not be as protective as
the law protecting minority shareholders in United States jurisdictions.
Under British Virgin Islands law, a shareholder of a company like the
Company, organized as an International Business Company under the law of the
British Virgin Islands, may bring an action against the company, even if
other shareholders do not wish to bring an action and even though no wrong
has been done to the shareholder personally. This is a representative action
(i.e., an action on the shareholder's own behalf and on behalf of other
persons in his class, or similarly situated). Instances where such
representative actions may be brought include: (i) to compel the company to
act in a manner consistent with the Memorandum of Association and Articles of
Association; (ii) to restrain directors from acting on resolutions, where
notice of a shareholders' meeting failed adequately to inform shareholders of
a resolution proposed at the meeting; (iii) to restrain the company, where it
proposes to perform an act not authorized by the Memorandum of Association
and the Articles of Association or to seek damages from directors to
compensate the company from the consequences of such an unauthorized act, or
to recover property of the company disposed of pursuant to such unauthorized
act; (iv) to restrain the company from acting upon a resolution that was not
made in good faith and for the benefit of shareholders as a whole; (v) to
redress where a resolution passed at a shareholders meeting was not properly
passed (e.g., it was not passed with the necessary majority); (vi) to
restrain the company from performing an act which is contrary to law; and
(vii) to restrain the company from taking any action in the name and for the
benefit of the company. Such an action also may be brought against directors
and promoters who have breached their fiduciary duties to the company, though
acts amounting to a breach of a fiduciary duty can be ratified by a general
meeting of shareholders, in the absence of fraud. Such actions against
directors and promoters only may be taken, however, if such directors and
promoters have power to influence the action taken by a general meeting by
means of, for instance, their votes as shareholders, thereby preventing the
company from suing them in the company's name. Although British Virgin
Islands law does permit a shareholder of a British Virgin Islands company to
sue its directors representatively or derivatively, the circumstances in
which any such action may be brought as set forth above may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those of shareholders in a United States company.

CURRENCY TRANSLATIONS

The Company's published consolidated financial statements are presented
in Hong Kong dollars ("HK$"), the lawful currency of Hong Kong. In this
Prospectus, references to "U.S. dollars", "US$" or "$" are to U.S. currency
and references to "Hong Kong dollars" or "HK$" are to Hong Kong currency.
Solely for the convenience of the reader, this Prospectus contains
translations of certain Hong Kong dollar amounts into U.S. dollars at
specified rates. These translations should not be construed as
representations that the Hong Kong dollar amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at the rate
indicated. Unless otherwise stated, the translations of Hong Kong dollars
into U.S. dollars have been made at the rate of HK$7.73 to US$1.00 (the
"Exchange Rate"). See "Exchange Rates" for historical information regarding
the Exchange Rate.

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THERE HAS BEEN NO EXERCISE OF THE
1,679,000 WARRANTS OR THE UNDERWRITER WARRANTS.

THE COMPANY

LJ International Inc. (the "Company") is a totally vertically integrated
producer of finished gemstones and fine quality gemstone jewelry. It is
engaged in cutting and polishing semi-precious gemstones and designing,
manufacturing, marketing and distributing gem set jewelry to fine jewelers,
department stores, national jewelry chains and electronic and specialty
retailers throughout North America and Western Europe. The Company's product
line includes all major categories that are sought by major retailers,
including earrings, necklaces, pendants, rings and bracelets. The jewelry
produced by the Company is crafted in gold, platinum and sterling silver and
is set with semi-precious stones. The average wholesale price of the jewelry
produced by the Company is approximately $100, which equates to retail prices
between $100 and $499.

The Company believes that its vertically integrated structure provides
significant advantages over its competitors. All profits from value added
processes are captured internally, rather than shared with third party
manufacturers. The result is very competitive pricing for the retailer and
enhanced profits for the Company. Innovative processes in stone cutting and
manufacturing further enhance the Company's competitive position.

The Company employs an international design team and all of its designs
and merchandising strategies are proprietary. The exclusive and innovative
concepts that are created offer brand potential. The Company's primary
marketing focus has been in North America where it has sold directly to
certain high volume customers who need specialized product development
services and through a marketing relationship with International Jewelry
Connection for those customers that need higher levels of service and
training.

The Company organizes its marketing and distribution strategies by
retail distribution channel. Concepts are developed for the specific needs
of different market segments. The Company has identified fine jewelers (Ben
Bridge and Carlyle), national jewelry chains (Sterling Inc.), department
stores (Macys and J C Penney), direct mail and electronic retailers (QVC
Network, Inc.) as prime retail targets. For the fiscal years ended April 30,
1997 and 1998, approximately 87% and 89% of sales, respectively, were in
North America.

The Company was incorporated as an international business company under
the International Business Companies Act of the British Virgin Islands on
January 30, 1997. The Company owns all of the issued share capital in
Lorenzo Jewelry Manufacturing (Hong Kong) Limited ("Lorenzo"), a company
incorporated in Hong Kong on February 20, 1987. Lorenzo owns all of the
issued share capital in Shantou S.E.Z. Lorenzo Gems & Craft Factory Co.,
Limited, Shantou Lorenzo Jewelry Manufacturing, and 60% of the issued share
capital in Lorenzo Marketing Co., Limited. Pursuant to a cooperative joint
venture agreement between Lorenzo and Guangdong Province Shantou Artcrafts
Imports and Exports Co., the Company controls the operating and financial
activities of Shantou Lorenzo Jewelry Manufacturing and is responsible for
all of its profits and losses. In addition, the Company owns all of the
issued share

<PAGE>

capital in Precious Gem Trading Limited (which owns all of the issued share
capital in Lorenzo Gems (Shenzhen) Co., Limited) and all of the issued share
capital in Golden Horizon Trading Limited (which owns all of the issued share
capital in Lorenzo Jewelry (Shenzhen) Co., Limited).

Unless otherwise indicated or the context otherwise requires, the terms
"LJ International Inc." and the "Company" as used in this Prospectus mean LJ
International Inc., its subsidiaries and those joint ventures in which the
Company has at least a 50% equity interest.

The Company's principal executive offices are located at Unit #12, 12/F,
Block A, Focal Industrial Center, 21 Man Lok Street, Hung Hom, Kowloon, Hong
Kong, telephone 011 (852) 2764-3622.

THE OFFERING

Securities Offered by the
Company. . . . . . . . . . . 1,679,000 Warrants and 1,679,000 shares of Common
Stock underlying the Warrants. Each Warrant
entitles the registered holder thereof to
purchase, at any time during the period
commencing on the Effective Date, through
April 15, 2003, one share of Common Stock at a
price of $5.75 per share, subject to adjustment
under certain circumstances. The Warrants offered
hereby are not exercisable unless, at the time of
exercise, the Company has a current prospectus
under the Securities Act covering the shares of
Common Stock issuable upon exercise of the
Warrants and such shares have been registered,
qualified or deemed to be exempt under the
securities laws of the states of residence of the
exercising holders of the Warrants. The Warrants
are subject to redemption by the Company, at the
option of the Company, at $0.25 per Warrant, upon
30 days' prior written notice, if the closing bid
price, as reported on the Nasdaq National Market,
or the closing sale price, as reported on a
national or regional securities exchange, as
applicable, of the shares of the Common Stock for
30 consecutive trading days ending within ten
days of the notice of redemption of the Warrants
averages in excess of $10.00 per share, subject
to adjustment. The Company is required to
maintain an effective registration statement with
respect to the Common Stock underlying the
Warrants prior to redemption of the Warrants.
Prior to the first anniversary of the Effective
Date, the Warrants are not redeemable by the
Company without the written consent of the
Underwriter. See "Description of Securities."

Securities Offered by
Selling Shareholders . . . . 292,000 shares of Common Stock underlying the
Underwriter Warrants. See "Description of
Securities" and "Selling Shareholders."

Use of Proceeds. . . . . . . The Company will not receive any proceeds from
the sale of the Underwriter Warrants or the
underlying Common Stock. All funds received by
the Company upon the exercise of the Warrants and
the Underwriter Warrants will be used for general
corporate purposes.

<PAGE>

Risk Factors . . . . . . . . There are substantial risks associated with an
investment in the Common Stock and Warrants,
including risks relating to dependence on major
customer, dependence on key personnel, control by
principal shareholder, competition, and the
Company's activities in Hong Kong and the PRC.
See "Risk Factors."

Nasdaq National Market
symbols
Common Stock . . . . . . . JADEF
Purchase Warrants. . . . . JADWF

<PAGE>

RISK FACTORS

THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INCLUDE A HIGH
DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE
THEIR ENTIRE INVESTMENT IN THE COMPANY. EACH PROSPECTIVE INVESTOR SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE MAKING A DECISION TO
PURCHASE THE SECURITIES OFFERED HEREBY.

DEPENDENCE ON MAJOR CUSTOMER

Although the Company sells to a large number of customers in a variety
of markets, the bulk of its sales involve rings to one volume customer, QVC
Network, Inc. For the fiscal year ended April 30, 1998, QVC Network, Inc.
accounted for approximately 55% of sales. Although the Company has
maintained a good and longstanding relationship with this customer, the
Company does not have any long-term contracts with this customer, who orders
only on a "purchase order" basis. The loss of QVC Network, Inc. as a customer
or a significant reduction in its orders would have a materially adverse
effect on the Company. No assurance can be given that QVC Network, Inc. will
continue to use the Company for the design and manufacture of their jewelry
requirements.

DEPENDENCE UPON KEY PERSONNEL

The ability of the Company to successfully carry out its business plans
will continue to be largely dependent upon the efforts of its current
management, particularly its Chairman, Yu Chuan Yih. Although the Company has
entered into an employment agreement with Mr. Yih, the loss of his services
would have a material adverse effect on the Company's ability to achieve its
business objectives. The Company maintains key-person life insurance in the
amount of US$2,000,000 on Mr. Yih's life, with the proceeds of such insurance
payable to the Company. See "Management."

CONTROL BY PRINCIPAL SHAREHOLDER

Yu Chuan Yih, the Company's Chairman, and members of his family
beneficially own approximately 68.9% of the outstanding voting securities of
the Company and, accordingly, continue to be able to elect a majority of the
Company's directors and to determine the disposition of all matters submitted
to a vote of the Company's shareholders. See "Principal Shareholders."

COMPETITION

The manufacture and distribution of jewelry is a highly competitive
industry characterized by a diversity and sophistication of product. The
Company competes with major domestic and international companies with
substantially greater financial, technical and marketing resources and
personnel than the Company. While the Company believes its vertically
integrated low-cost, high-volume and quality manufacturing process provides
it with a competitive edge, there can be no assurance other jewelry
manufacturers will not similarly develop low-cost, high-volume production
capability or an even better process, thereby providing greater competition
for the Company and materially affecting its business prospects.

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MATERIAL FACTORS RELATING TO THE OPERATIONS OF THE BUSINESS

As a manufacturer and merchandiser of low-cost, high-quality gem-set
jewelry, the Company's existing and future operations are and will be
influenced by several factors, including technological developments in the
mass production of jewelry, the ability of the Company to efficiently meet
the design and production requirements of its customers, and the market
acceptance of its customers' jewelry. Further factors impacting the success
of the Company's operations are increases in expenses associated with
continued sales growth, the ability of the Company to control costs,
management's ability to evaluate the public's taste and new orders to target
satisfactory profit margins, the capacity of the Company to develop and
manage the introduction of new designed products, and competition. Quality
control is also essential to the Company's operations, since customers demand
compliance with design and product specifications and consistency of
production. There can be no assurance that the revenue growth will be
sustained on a quarterly or annual basis.

HONG KONG: TRANSFER OF SOVEREIGNTY

The Company's sales and marketing operations are performed principally
at the Company's executive offices which are located in Hong Kong. As a
result, the Company's results of operations and financial condition may be
influenced by the political situation in Hong Kong and by the general state
of the Hong Kong economy. On July 1, 1997, sovereignty over Hong Kong was
transferred from the United Kingdom to China, and Hong Kong became a Special
Administrative Region of China (an "SAR"). As provided in the Sino-British
Joint Declaration on the Question of Hong Kong (the "Joint Declaration") and
the Basic Law of the Hong Kong SAR of China (the "Basic Law"), the Hong Kong
SAR is to have a high degree of autonomy except in foreign and defense
affairs. Under the Basic Law, the Hong Kong SAR is to have its own
legislature, legal and judicial system and full economic autonomy for 50
years. Based on the current political conditions and the Company's
understanding of the Basic Law, the Company does not believe that the
transfer of sovereignty over Hong Kong will have an adverse impact on the
Company's financial and operating environment. There can be no assurance,
however, that changes in political or other conditions will not result in
such an adverse impact.

PRC CONSIDERATIONS

The Company's manufacturing facilities are located in the PRC. The
results of operations and financial condition of the Company may therefore be
influenced by the economic, political, legal and social conditions in the
PRC.

Since 1978, the PRC government has been reforming, and is expected to
continue to reform, the PRC's economic and political systems. Such reforms
have resulted in significant social progress. Other political, economic and
social factors could also lead to further readjustment of the reform
measures. This refinement and readjustment process may not always have a
positive effect on the Company's operations in the PRC. The Company, at
times, may also be adversely affected by changes in policies of the PRC's
government such as changes in laws and regulations (or the interpretation
thereof), the introduction of additional measures to control inflation,
changes in the rate or method of taxation and imposition of additional
restrictions on currency conversion and remittances abroad. The management
of the Company believes that because of the broad support for the reform
process and the fact that the economic system in the PRC has already
undergone extensive changes as a result of the success of such reforms, the
basic principles underlying the reforms will continue to provide an
acceptable framework for the PRC's political and economic systems.

<PAGE>

DEPENDENCE ON CHINA FACTORIES

The Company's products are currently manufactured at its factories
located in Shantou and Shenzhen, China. Firefighting and disaster relief or
assistance in China are primitive by Western standards. The Company has
obtained fire, casualty and theft insurance aggregating approximately $5.1
million covering various of its stock in trade, goods and merchandise,
furniture and equipment and factory buildings in China. The proceeds of such
insurance may not be sufficient to cover material damage to, or the loss of,
the Company's factories due to fire, severe weather, flood or other cause,
and such damage or loss would have a material adverse effect on the Company's
financial condition, business and prospects. Consistent with the customary
practice among enterprises in China, the Company does not carry any business
interruption insurance.

LIMITED SEASONALITY

Sales of jewelry by the Company to retailers are generally stronger
between June and January of each year due to the importance of the holiday
selling season. The approximately 55% of the Company's sales during the
fiscal year ended April 30, 1998 to its largest customer, QVC Network, Inc.,
were not seasonal in nature. It has been management's experience that the
remaining 45% of the Company's total sales are seasonally sensitive.

GENERAL ECONOMIC CONDITIONS

The Company's sales and net income have been steadily growing. Retail
jewelry sales are sensitive to fluctuations in the economic cycle.
Unfavorable general economic conditions have an adverse effect on consumer
spending and, therefore, on the Company's business. Management believes its
growth and products are less sensitive to economic downturns due to its mass
manufacturing capabilities, merchandising, and low-cost products which are
more impulse purchase items. There can be no assurance that unfavorable
general economic conditions or a downturn in consumer confidence would not in
the future have an adverse effect on consumer spending preferences and,
therefore, on the Company's business.

LACK OF PATENT PROTECTION FOR MANUFACTURING PROCESS

Management believes that one of its most competitive advantages is its
vertically integrated manufacturing structure that produces high quality
jewelry in large quantities and at favorable prices. However, the general
concepts of such high volume production are known in the industry and the
ability of others to build upon the basic processes and develop similar, if
not better, applications to high volume production could have an adverse
competitive impact.

HOLDING COMPANY STRUCTURE; RESTRICTIONS ON THE PAYMENT OF DIVIDENDS

The Company has no direct business operations, other than its ownership
of its subsidiaries. While the Company has no current intention of paying
dividends, should it decide in the future to do so, as a holding company, the
Company's ability to pay dividends and meet other obligations depends upon
the receipt of dividends or other payments from its operating subsidiaries
and its other holdings and investments. In addition, the Company's operating
subsidiaries, from time to time, may be subject to restrictions on their
ability to make distributions to the Company, including as a result of
restrictive

<PAGE>

covenants in loan agreements, restrictions on the conversion of local
currency into U.S. dollars or other hard currency and other regulatory
restrictions. See "Dividends."

RIGHTS OF SECURITY HOLDERS UNDER BVI LAW MAY BE LESS THAN UNDER U.S.
JURISDICTIONS

The Company's corporate affairs are governed by its Memorandum of
Association and Articles of Association and by the International Business
Companies Act of the BVI. Principles of law relating to such matters as the
validity of company procedures, the fiduciary duties of the Company's
management and the rights of the Company's security holders may differ from
those that would apply if the Company were incorporated in a jurisdiction
within the United States. The rights of security holders under BVI law are
not as clearly established as the rights of security holders under the law or
judicial precedent in many United States jurisdictions. Thus, the holders of
securities of the Company may have more difficulty in protecting their
interests from actions by the Company's management or Board of Directors than
they might have as security holders of a company incorporated in many United
States jurisdictions. In addition, there is uncertainty whether the courts
of BVI would enforce judgments of the courts of the United States and of
other foreign jurisdictions. There is also uncertainty whether the courts of
BVI would entertain actions brought in BVI which are predicated upon the
securities laws of the United States.

Under the laws of most jurisdictions in the US, majority and controlling
shareholders generally have certain "fiduciary" responsibilities to the
minority shareholders. Shareholder action must be taken in good faith and
actions by controlling shareholders which are obviously unreasonable may be
declared null and void. BVI law protecting the interests of minority
shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in US jurisdictions. In addition, in most
US jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, pursuant to which directors must
properly apprise themselves of all reasonably available information, and a
duty of loyalty, pursuant to which they must protect the interests of the
corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any
profit or advantage. Many US jurisdictions have enacted various statutory
provisions which permit the monetary liability of directors to be eliminated
or limited. Under BVI law, liability of a corporate director to the
corporation is basically limited to cases of willful malfeasance in the
performance of his duties or to cases where the director has not acted
honestly and in good faith and with a view to the best interests of the
corporation.

Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment to the Company's Memorandum of
Association and Articles of Association or an increase or reduction in the
Company's authorized capital, which would require shareholder approval under
the laws of most US jurisdictions. In addition, the directors of a BVI
corporation, subject to court approval but without shareholder approval, may,
among other things, implement a reorganization, certain mergers or
consolidations, the sale, transfer, exchange or disposition of any assets,
property, part of the business, or securities of the corporation, the
winding-up or dissolution of the corporation, or any combination thereof, if
they determine it is in the best interests of the corporation, its creditors,
or its shareholders. The Board of Directors has no intention of taking any
action of this sort at present, but the ability of the Board of Directors to
amend the Memorandum of Association and Articles of Association without
shareholder approval could delay, deter, or prevent a change in control of
the Company, including a tender offer to purchase Common Stock at a premium
over then current market prices. See "Description of Securities--Differences
in Corporate Law."

<PAGE>

POTENTIAL DIFFICULTY IN EFFECTING SERVICE OF LEGAL PROCESS AND ENFORCING
JUDGMENTS AGAINST THE COMPANY AND ITS MANAGEMENT

The Company is a British Virgin Islands holding company, and all or a
substantial portion of the assets of the Company and its subsidiaries are
located in China and Hong Kong. In addition, all but two of the directors
and officers of the Company are non-residents of the United States, and all
or a substantial portion of the assets of such non-residents are located
outside the United States. As a result, it may not be possible to effect
service of process within the United States upon such persons, including with
respect to matters arising under the Securities Act. Moreover, there is
doubt as to whether the courts of the British Virgin Islands, China or Hong
Kong would enforce (i) judgments of United States courts against the Company,
its directors or its officers predicated on the civil liability provisions of
the securities laws of the United States or any state thereof or (ii) in
original actions brought in the British Virgin Islands, China or Hong Kong,
liabilities against the Company or such non-residents predicated upon the
securities laws of the United States or any state thereof. See
"Enforceability of Civil Liabilities and Certain Foreign Issuer
Considerations."

NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE WARRANTS

The Warrants are not exercisable unless, at the time of the exercise,
the Company has a current prospectus covering the shares of Common Stock
issuable upon exercise of the Warrants, and such shares are registered,
qualified or deemed to be exempt under the securities laws of the states of
residence of the exercising holders of the Warrants. For the life of the
Warrants, the Company will attempt to maintain a current effective
registration statement relating to the shares of Common Stock issuable upon
exercise of the Warrants. If the Company is unable to maintain a current
registration statement because the costs render it uneconomical, or because
the value of the shares of Common Stock underlying the Warrants is less than
the exercise price, or any number of other reasons, the Warrant holders will
be unable to exercise the Warrants and the Warrants may become valueless.

Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the after-market or may
move to jurisdictions in which the shares underlying the Warrants are not
registered or qualified during the period that the Warrants are exercisable.
In this event, the Company would be unable to issue shares of Common Stock to
those persons desiring to exercise their Warrants (whether in response to a
redemption notice or otherwise), unless and until the shares could be
qualified for sale in the jurisdictions in which such purchasers reside, or
exemptions exist in such jurisdictions from such qualification. Warrant
holders would have no choice but to attempt to sell the Warrants or allow
them to expire unexercised.

NON-EXERCISE OF WARRANTS CALLED FOR REDEMPTION

The Warrants are subject to redemption by the Company, at the option of
the Company, at $0.25 per Warrant, upon 30 days' prior written notice, if the
closing bid price, as reported on the Nasdaq National Market, or the closing
sale price, as reported on a national or regional securities exchange, as
applicable, of the shares of the Common Stock for 30 consecutive trading days
ending within ten days of the notice of redemption of the Warrants averages
in excess of $10.00 per share, subject to adjustment. Prior to the first
anniversary of the Effective Date, the Warrants will not be redeemable by the
Company without the written consent of the Underwriter. The Company is
required to maintain an effective registration statement with respect to the
Common Stock underlying the Warrants prior to redemption of

<PAGE>

the Warrants. In the event the Company elects to redeem the Warrants, such
Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will
be entitled only to the redemption price. Redemption of the Warrants could
force Warrant holders either to (i) exercise the Warrants and pay the
exercise price thereof at a time when it may be less advantageous
economically to do so, or (ii) accept the redemption price in consideration
for cancellation of the Warrants, which could be substantially less than the
market value thereof at the time of redemption. See "Description of
Securities - Warrants."

UNDERWRITER WARRANTS

The Company has sold to the Underwriter and/or persons related to the
Underwriter, for nominal consideration, the Common Stock Underwriter Warrants
and the Warrant Underwriter Warrants. The holders of the Underwriter
Warrants have certain registration rights with respect to the Underwriter
Warrants and the shares of Common Stock underlying the Underwriter Warrants
(the "Underlying Shares"). In addition, the sale, or even the possibility of
sale, of the securities issuable upon exercise of the Underwriter Warrants
could have an adverse effect on the market price for the Company's securities
or on the Company's ability to obtain future financing. If and to the extent
the Underwriter Warrants are exercised, shareholders may experience dilution
in the book value of their holdings.

RISKS RELATED TO UNAVAILABILITY OF INFORMATION DUE TO EXEMPTIONS UNDER THE
EXCHANGE ACT FOR A FOREIGN PRIVATE ISSUER

The Company is a foreign private issuer within the meaning of the rules
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
As such, the Company is exempt from certain provisions applicable to United
States public companies, including: (i) the rules under the Exchange Act
requiring the filing with the Securities and Exchange Commission (the
"Commission") of quarterly reports on Form 10-Q or current reports on Form
8-K; (ii) the sections of the Exchange Act regulating the solicitation of
proxies, consents or authorizations in respect of a security registered under
the Exchange Act; and (iii) the sections of the Exchange Act requiring
insiders to file public reports of their stock ownership and trading
activities and establishing insider liability for profits realized from any
"short-swing" trading transaction. Because of these exemptions, investors are
not afforded the same protections or information generally available to
investors in public companies organized in the United States.

FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE

Prospective purchasers of the securities should carefully consider the
foregoing risk factors and the other information contained in this Prospectus
before making an investment in the securities. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by
the use of forward-looking terminology such as "believes", "expects", "may",
"will", "should" or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy and may
contain projections as to future revenues and earnings ("projections"). Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the risk factors described in this Prospectus. No assurance can be
given that the future results covered by the forward-looking statements or
projections will be achieved. In the case of projections, the estimates of
revenues and earnings are further conditioned upon assumptions included in
the projections. There can be no assurance that these assumptions will

<PAGE>

prove accurate or that future events will not cause material changes in the
Company's business which adversely affect financial results. The foregoing
matters constitute cautionary statements identifying important factors with
respect to such forward-looking statements and projections, including certain
risks and uncertainties that could cause actual results to vary materially
from the future results covered in such forward-looking statements and
projections. Other factors could also cause actual results to vary
materially from the future results covered in such forward-looking statements
and projections.

<PAGE>

USE OF PROCEEDS

The Company presently anticipates that the proceeds from the exercise of
the Warrants and the Underwriter Warrants will be applied and allocated to
the working capital of the Company for general corporate purposes. To the
extent that the proceeds are not used immediately, they may be invested in
short-term interest bearing, investment grade securities.

NATURE OF TRADING MARKET

The Common Stock is traded in the over-the-counter market and is quoted
on The Nasdaq National Market under the symbol "JADEF." The following table
sets forth, on a quarterly basis, the high and low sales prices for the
Common Stock since its listing on The Nasdaq National Market on April 15,
1998:

<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
------------- ---- ---
<S> <C> <C>
April 30, 1998 $7.50 $5.75
July 31, 1998 $7.50 $4.50
</TABLE>

The Warrants are traded in the over-the-counter market and are quoted on
The Nasdaq National Market under the symbol "JADWF." The following table
sets forth, on a quarterly basis, the high and low sales prices for the
Warrants since their listing on The Nasdaq National Market on April 15, 1998:

<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
------------- ---- ---
<S> <C> <C>
April 30, 1998 $1.625 $0.625
July 31, 1998 $1.656 $0.625
</TABLE>

The Company does not believe that there is any principal non-United
States trading market for the Common Stock or the Warrants. The Company
believes that a substantial majority of the outstanding Common Stock and
Warrants are held in the United States by Cede & Co. as record holder.

DIVIDENDS

The Company currently intends to retain its earnings to support its
growth strategy and does not anticipate paying any dividends on the Common
Stock in the foreseeable future. As a holding company, the ability of the
Company to pay dividends depends upon the receipt of dividends or other
payments from its subsidiaries and its other holdings and investments. In
addition, the Company's operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to the
Company, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other
currency and other regulatory restrictions. See "Risk Factors--Holding
Company Structure; Restrictions on the Payment of Dividends." Any
determination to pay dividends in the future will be at the discretion of the
Company's Board of Directors and will depend upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant at that time by the Company's Board of Directors. Dividends,
if any, paid in the future on the Common Stock may be paid in either U.S.
dollars or Hong Kong dollars.

<PAGE>

EXCHANGE RATES

The Company has prepared its consolidated financial statements in
accordance with Hong Kong generally accepted accounting principles
consistently applied and publishes such statements in Hong Kong dollars, the
functional currency of the Company's subsidiaries and the legal tender
currency of Hong Kong. All references to "Hong Kong dollars" or "HK$" are to
Hong Kong dollars. All references to "U.S. Dollars," "dollars" or "$" are to
United States dollars. Conversion of amounts from Hong Kong dollars into
United States dollars for the convenience of the reader has been made at the
exchange rate of US$1.00 = HK$7.73.

The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated:

CALENDAR YEAR PERIOD END AVERAGE(2) HIGH LOW
------------- ---------- ---------- ---- ---
NOON BUYING RATE(1)
-------------------
(HK$PER US$)
<S> <C> <C> <C> <C>
1993 7.7280 7.7348 7.7650 7.7230
1994 7.7375 7.7290 7.7530 7.7225
1995 7.7323 7.7357 7.7665 7.7300
1996 7.7332 7.7345 7.7440 7.7310
1997 7.7456 7.7431 7.7550 7.7275
1998 (through July 31, 1998) 7.7483 7.7462 7.7497 7.7412

</TABLE>

- ------------------------

(1) The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of
New York.

(2) Determined by averaging the rates on the last business day of each month
during the relevant period.

<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA
(HONG KONG DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following selected consolidated financial data with respect to each
of the years in the three-year period ended April 30, 1998 have been derived
from the Company's audited consolidated financial statements. The data with
respect to the year ended April 30, 1994 have been derived from the Company's
unaudited consolidated financial statements. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.

The Company prepares its Consolidated Financial Statements in accordance
with Hong Kong GAAP, which differs in certain significant respects from US
GAAP. For a discussion of the significant differences between Hong Kong GAAP
and US GAAP, see Note 15 of Notes To And Forming Part Of The Financial
Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

YEAR ENDED APRIL 30,
--------------------
1994 1995 1996 1997 1998 1998
HK$ HK$ HK$ HK$ HK$ US$
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues . . . . . . . . . 45,968 48,365 87,318 92,258 124,199 16,067
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
Operating income . . . . . . . . . 400 1,863 13,828 21,930 31,540 4,080
Other income (expense) . . . . . . (3,905) (5,930) (5,693) (3,999) (6,964) (901)
------ ------ ------ ------ ------- ------
Income (loss) before income
taxes. . . . . . . . . . . . . . (3,505) (4,067) 8,135 17,931 24,576 3,179
Income taxes . . . . . . . . . . . (613) (27) (620) (2,210) (2,120) (274)
------ ------ ------ ------ ------- ------
Net income (loss). . . . . . . . . (4,118) (4,094) 7,515 15,721 22,456 2,905
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
Dividends per share. . . . . . . . 0.57
Earnings (loss) per share. . . . . (0.94) (0.93) 1.71 3.58 4.95 0.64
Weighted average number of
shares outstanding
(thousands). . . . . . . . . . . 4,387 4,387 4,387 4,387 4,539 4,539

</TABLE>

<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with US GAAP
Operating revenues . . . . . . . . . 45,968 48,365 87,318 92,258 124,199 16,067
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
Operating income (loss) before
income taxes . . . . . . . . . . (3,505) (4,639) 7,563 16,599 14,325 1,852
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
Net income (loss). . . . . . . . . (4,118) (4,666) 6,943 14,389 12,205 1,578
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
Dividends per share. . . . . . . . 0.55
Earnings (loss) per share. . . . . (0.91) (1.03) 1.53 3.18 2.65 0.34
Weighted average number of
shares outstanding
(thousands). . . . . . . . . . . 4,530 4,530 4,530 4,530 4,601 4,601

</TABLE>

BALANCE SHEET DATA:

AS OF APRIL 30,
---------------
1994 1995 1996 1997 1998 1998
HK$ HK$ HK$ HK$ HK$ US$
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Working capital. . . . . . . . . . (15,793) (22,877) (15,092) (2,757) 39,090 5,056
Total assets . . . . . . . . . . . 67,681 65,160 64,763 82,879 154,616 20,002
Long-term obligations. . . . . . . 14,383 9,338 13,913 13,006 10,544 1,364
Total shareholders' equity . . . . 296 (3,750) 1,260 16,981 90,257 11,676
Amounts in accordance with US GAAP
Working capital. . . . . . . . . . (15,793) (22,877) (15,092) (2,757) 39,090 5,056
Total assets . . . . . . . . . . . 67,606 64,513 63,544 78,533 142,307 18,410
Long-term obligations. . . . . . . 14,383 9,338 13,913 13,006 10,544 1,364
Total shareholders' equity . . . . 221 (4,403) 41 12,635 77,948 10,084

</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the financial statements and notes to the financial statements appearing
elsewhere herein. The amounts reflected in the following discussion are in
Hong Kong Dollars (HK$), the functional currency of the Company's
subsidiaries and the legal tender currency of Hong Kong Special
Administrative Region of China. The average exchange rate adopted for the
periods presented is US$1 = HK$7.73 and unless otherwise indicated is the
rate used in the discussion herein.

OVERVIEW

LJ International Inc. ("LJI" or the "Company") owns 100% of the equity
of Lorenzo Jewelry Manufacturing (Hong Kong) Limited ("Lorenzo"), Shantou
S.E.Z. Lorenzo Gems & Craft Factory Co., Ltd., Shantou Lorenzo Jewelry
Manufacturing, Precious Gem Trading Ltd., Lorenzo Gems (Shenzhen) Co., Ltd.,
Golden Horizon Trading Ltd., Lorenzo Jewelry (Shenzhen) Co., Ltd. and 60% of
the issued share capital in Lorenzo Marketing Co., Ltd. Collectively, these
entities are referred to as "the Company." LJI is a British Virgin Islands
("BVI") holding company and substantially all of LJI's operating assets are
held by its subsidiaries, which are located in Hong Kong and/or China. While
Lorenzo has operated since 1987, LJI was incorporated in January 1997, and
had subsequently merged with Lorenzo and its subsidiaries.

LJ International Inc. is a totally vertically integrated producer of
finished gemstones and fine quality gemstone jewelry. It is engaged in
cutting and polishing semi-precious gemstones and designing, manufacturing,
marketing and distributing gem set jewelry to fine jewelers, department
stores, national jewelry chains and electronic and specialty retailers
throughout North America and Western Europe. The Company's product line
includes all major categories that are sought by major retailers, including
earrings, necklaces, pendants, rings and bracelets. The jewelry produced by
the Company is crafted in gold, platinum and sterling silver and is set with
semi-precious stones. The average wholesale price of the jewelry produced by
the Company is approximately $100, which equates to retail prices between
$100 and $499.

The Company employs an international design team and all of its designs
and merchandising strategies are proprietary. The exclusive and innovative
concepts that are created offer brand potential. The Company's primary
marketing focus has been in North America where it has sold directly to
certain high volume customers who need specialized product development
services and through a marketing relationship with IJC (International Jewelry
Connection) for those customers that need higher levels of service and
training.

The Company organizes its marketing and distribution strategies by
retail distribution channel. Concepts are developed for the specific needs
of different market segments. The Company has identified

<PAGE>

fine jewelers (Ben Bridge and Caryle), national jewelry chains (Sterling
Inc.), department stores (Macys and J C Penney), direct mail and electronic
retailers (QVC Network, Inc.) as prime retail targets. For the fiscal years
ended April 30, 1997 and 1998, approximately 87% and 89% of sales,
respectively, were in North America.

During fiscal 1998, the Company completed its initial public offering
and raised gross proceeds of HK$58,051,000 (US$7,510,000) from the sale of
common stock and warrants. Additional amounts were received after year-end
from the exercise of the over-allotment in the offering. The completion of
this offering was a very significant development for the Company and required
substantial management time away from the normal operations of the Company.
In 1999, management is looking forward to re-focusing all its energy to the
operation of the Company's primary business with the goal of further
increasing sales and operating performance.

FISCAL 1998 COMPARED TO FISCAL 1997

NET SALES

Net sales for fiscal 1998 totaled HK$124,199,000 (US$16,067,000),
compared to HK$92,258,000 (US$11,935,000) in fiscal 1997, an increase of
HK$31,941,000 (US$4,132,000) or 34.6%. This increase resulted from an
increase of over 900% in sales through International Jewelry Connection
("IJC") in the United States from HK$1,392,000 (US$180,000) in fiscal 1997 to
HK$14,152,000 (US$1,831,000) in fiscal 1998. IJC is a network of sales
professionals which sell LJI products to fine jewelry retailers, national
jewelry chains and department stores (see "Business-Sales and Marketing").
Sales to the Company's largest customer, QVC Network, Inc., also rose by 8%,
and represented 55% of sales in fiscal 1998 compared to 69% in 1997.

GROSS PROFIT

Gross profit for fiscal 1998 was HK$60,906,000 (US$7,879,000), compared
to HK$44,205,000 (US$5,719,000) in fiscal 1997, an increase of HK$16,701,000
(US$2,161,000) or 37.8%, whereas gross profit margin increased to 49.0% from
47.9% in fiscal 1997. This increase was mainly due to increased sales of
higher margin products and better production efficiency and control linked to
utilization of new production equipment in the Shantou facility.

The increase in gross margin was impacted by the sales of HK$10,142,000
(US$1,312,000) in gems stone rough inventory to another company. Gross
margin on this sale was only 10%. The Company liquidates the inventory by
selling to other companies while it is not a regular occurrence. The Company
may periodically utilize this strategy to reduce excess gems stone inventory
when it is considered beneficial to the Company.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses for fiscal 1998 were HK$33,545,000
(US$4,340,000), an increase of 41.8% as compared with HK$23,657,000
(US$3,060,000) in fiscal 1997. HK$4,255,000 (US$550,000) was directly
related to startup costs associated with the new Shenzhen factory which
included personnel and training costs.

<PAGE>

Selling expenses were increased by HK$2,464,000 (US$319,000) from
HK$6,484,000 (US$839,000) or 7% of sales in fiscal 1997 to HK$8,948,000
(US$1,158,000) or 7% of sales in fiscal 1998 basically due to commission,
overseas travelling expenses and bonus payment for contracted sales force as
well as increased marketing and promotional expenses associated with increase
in sales.

General and administrative expenses increased by HK$7,424,000
(US$960,000) from HK$17,173,000 (US$2,221,600) in fiscal 1997 to
HK$24,597,000 (US$3,182,000) in fiscal 1998. The increase was mainly due to
expansion in management and administrative staff, increase in wage level, as
well as various office and administrative expenses associated with increase
in sales.

OTHER INCOME/EXPENSES

Net other expenses totaled HK$2,785,000 (US$360,000) during fiscal 1998
as compared to a net other expense of HK$2,617,000 (US$339,000) in fiscal
1997 and consisted principally of interest expense and rental income.

Interest expenses increased by HK$2,965,000 (US$384,000) from
HK$3,999,000 (US$517,000) in fiscal 1997 to HK$6,964,000 (US$901,000) in
fiscal 1998. This 74% increase was principally due to general increase in
interest rate level and additional borrowings to fund business growth and
establish a new jewelry factory in Shenzhen.

Net rental income for fiscal 1998 was HK$1,273,000 (US$165,000) as
compared with net rental income of HK$1,280,000 (US$166,000) in fiscal 1997.
There was no material change between the two periods.

During fiscal 1998, the Company sold an investment property for
HK$3,800,000 (US$492,000) to Mr. Yu Chuan Yih and had a gain of HK$2,904,000
(US$376,000). The consideration of the property was based on a valuation
report prepared by an independent professional appraiser. Accounting
treatment for this transaction is different under US GAAP (see
"Reconciliation to US GAAP").

INCOME TAXES

The Company was incorporated in the British Virgin Islands and, under
current law of the British Virgin Islands, is not subject to tax on income or
on capital gains.

For the Company's subsidiaries in Hong Kong, prevailing corporate income
tax rate is 16%.

The Company's subsidiaries in the PRC are registered to qualify as
Foreign Investment Enterprises in the PRC and are eligible for certain tax
holidays and concessions. Accordingly, certain of the PRC subsidiaries are
exempted from PRC income tax for two years starting from their first profit
making years, followed by a 50% reduction of tax for next three years. These
subsidiaries have sustained losses for the PRC income tax purpose. As a
result, the Company has not recorded any PRC income tax expense. PRC income
tax in the future will be calculated at the applicable rates relevant to the
PRC subsidiaries which currently are 15%.

For fiscal 1998, income taxes decreased by HK$90,000 (US$12,000) to
HK$2,120,000 (US$274,000) from HK$2,210,000 (US$286,000) in fiscal 1997.
Despite increase in profit during the

<PAGE>

year which is attributable to the full operation of the PRC subsidiaries,
income tax actually decreased as the result of restructuring of the
intra-group pricing policy.

FISCAL 1997 COMPARED TO FISCAL 1996

NET SALES

Net sales increased by HK$4,940,000 (US$639,000), or 5.7% from
HK$87,318,000 (US$11,296,000) in fiscal year 1996, to HK$92,258,000
(US$11,935,000) in fiscal year 1997. This increase was due to increased
sales to existing customers, a moderate shift in the Company's product mix
toward high value- added products and improved pricing.

GROSS PROFIT

In fiscal year 1997, total gross profit increased by 40.6% to
HK$44,205,000 (US$5,719,000) from HK$31,423,000 (US$4,065,000) in fiscal 1996
while gross profit margin increased to 47.9% from 36% in fiscal 1996. This
increase was basically due to increased sales and improved production
efficiency as a result of improvement in the Shantou facility in the aspects
of fully-trained skilled craftsman and well developed production technology.
Since mid-1996, all jewelry products were assembled by the Company which also
improved gross margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses for the fiscal year ended April 30,
1997 were HK$23,657,000 (US$3,060,000), an increase of 21.7% as compared with
HK$19,433,000 (US$2,514,000) in fiscal year 1996.

Selling expenses increased by HK$1,201,000 (US$155,000) from
HK$5,283,000 (US$683,000) in fiscal year 1996 to HK$6,484,000 (US$839,000) in
fiscal year 1997 basically due to commission and bonus payment to contracted
sales force who referred customers to the Company on a commission basis.
Other marketing expenses also increased with the increase in sales.

General and administrative expenses increased by HK$3,023,000
(US$391,000) from HK$14,150,000 (US$1,831,000) in fiscal year 1996 to
HK$17,173,000 (US$2,222,000) in fiscal year 1997. The increase was
principally due to expansion in workforce, an increase in wage levels, as
well as various office and administrative expenses associated with increase
in sales.

OTHER INCOME/EXPENSES

Other income/expenses during fiscal 1997 consisted of interest expenses,
rental income and minority interest. Net other expense totaled HK$2,617,000
(US$339,000) during the year as compared to HK$3,855,000 (US$499,000) in
fiscal 1996.

Interest expenses decreased by HK$1,694,000 (US$219,000) from
HK$5,693,000 (US$736,000) in fiscal 1996 to HK$3,999,000 (US$517,000) in
fiscal 1997. This 29.8% decrease was basically due to reduction in general
interest rate levels, better trade financing terms and increased use of gold
loans for financing gold purchases which cost was substantially less than
normal financing (see "Liquidity and Capital Resources").

<PAGE>

Net rental income decreased by HK$544,000 (US$70,000) from HK$1,824,000
(US$236,000) in fiscal 1996 to HK$1,280,000 (US$166,000) in fiscal 1997.
This 30% decrease in net rental income was principally attributable to the
several months' vacant period for the Company's investment properties when
the original tenancy agreements expired and the Company was seeking new
tenants.

Minority interest for the Company, which was HK$102,000 (US$13,000) in
fiscal 1997, reflected the loss of Lorenzo Marketing Co., Ltd. as a result of
unfavorable market conditions in Japan.

INCOME TAXES

Income taxes increased by 256% from approximately HK$620,000 (US$80,000)
in fiscal 1996 to HK$2,210,000 (US$286,000) in fiscal 1997. The increase in
income taxes was attributable to the increase in the taxable earnings of the
Company.

LIQUIDITY AND CAPITAL RESOURCES

LJI has no direct business operations other than its ownership of its
subsidiaries. Its ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from its operating
subsidiaries. There currently are no known restrictions on LJI's subsidiaries
to pay dividends to LJI; however, LJI does not have current intent of paying
dividends to its shareholders.

The primary sources of the Company's cash for working capital and
capital expenditure have been net cash flows from operating activities,
capital lease financing and borrowings. Seasonal working capital needs have
been met through short-term borrowing under a revolving line of credit.

For the fiscal year ended April 30, 1998, as a result of HK$31,455,000
(US$4,069,000) cash provided by financing activities and HK$1,545,000
(US$200,000) and HK$19,454,000 (US$2,517,000) used by operating and investing
activities, respectively, cash and cash equivalents increased by
HK$10,456,000 (US$1,353,000) during the year.

Net cash used by operating activities in fiscal 1998 was HK$1,545,000
(US$200,000) as compared with net cash of HK$1,361,000 (US$176,000) provided
by operating activities in fiscal 1997. Negative cash flows from operating
activities are principally the result of improved operating results, offset
by increased working capital requirement attributable to the increase in
accounts receivable and inventory levels.

As of April 30, 1998, accounts receivable increased by HK$22,615,000
(US$2,926,000) to HK$31,068,000 (US$4,019,000) from HK$8,453,000
(US$1,094,000) as of April 30, 1997. The increase is mainly due to increase
in sales for the period, in particular the sales to new customers who are
generally offered a 60-day credit period. Based upon the historical
collectability of its receivables and the nature of the companies with which
it engages, the Company has experienced excellent collection history.

Inventory increased by HK$9,801,000 (US$1,268,000) from HK$37,193,000
(US$4,812,000) as of April 30, 1997 to HK$46,994,000 (US$6,079,000) as of
April 30, 1998. The increase was due to management's anticipation of
significant increase in sales for the first and second quarters of the new
fiscal year.

<PAGE>

For the fiscal year ended April 30, 1998, net cash used in investment
activities was HK$19,454,000 (US$2,517,000), an increase of HK$18,219,000
(US$2,357,000) as compared with HK$1,235,000 (US$160,000) in fiscal 1997.
The net cash used in investment activities during fiscal 1998 included
HK$22,728,000 (US$2,940,000) for the establishment of the new manufacturing
facility in Shenzhen and the purchase of new machinery for the Shenzhen and
Shantou facilities; HK$525,000 (US$68,000) of organization costs, offset by
net proceeds of HK$3,800,000 (US$492,000) received from the sale of an
investment property to a related party.

As of April 30, 1998, the Company had various letters of credit under
banking facilities which aggregated HK$32,100,000 (US$4,153,000) as of April
30, 1998. The Company had HK$17,622,000 (US$2,280,000) and HK$16,495,000
(US$2,134,000) outstanding under its letters of credit as of April 30, 1997
and 1998, respectively. Under its letters of credit, the Company is required
to maintain certain cash balance which totaled HK$3,036,000 (US$393,000) and
HK$3,111,000 (US$402,000) as of April 30, 1997 and 1998, respectively.

The Company has also secured gold loan facilities with various banks in
Hong Kong. Due to lower interest rates charged for gold loans and declining
prices of gold, the cost to the Company through its gold loan program has
been substantially less than the costs that would be incurred if the Company
were to finance the purchase of all of its gold requirements with borrowings
under its letter of credit facility or other credit arrangements. The gold
loan, however, does expose the Company to certain market risks associated
with potential future increases in the price of gold, and the Company
currently does not hedge against such risks. Under the gold loan
arrangements, the Company may defer the purchase until such time as the
Company decides appropriate, the price being paid will be the current market
price at time of payment. The Company had outstanding loans to purchase
2,300 ounces of gold as of April 30, 1997 and 1998, with the related balances
being HK$6,376,000 (US$825,000) and HK$5,810,000 (US$752,000), respectively.
Interest rates for these loans were 3.3% to 3.6% as of April 30, 1998.
Unrealized gain on the unsettled gold loans as of April 30, 1997 and 1998
were HK$474,000 (US$61,000) and HK$566,000 (US$73,000), respectively.

Long-term mortgage loans on the Company's investment properties
aggregated HK$15,217,000 (US$1,969,000) and HK$13,847,000 (US$1,791,000) as
of April 30, 1997 and 1998, respectively. Substantially all properties of
the Company are pledged as collateral for its banking facilities.

On October 17, 1997, the Company completed the sale of promissory notes
amounting to HK$6,049,000 (US$783,000). These notes beared interest of 7%
and the note holders were repaid in full from the proceeds of the initial
public offering of the Company and, in addition, received 156,500 shares of
the Company's common stock upon completion of the public offering. As of
April 30, 1998, the Company had outstanding promissory notes amounting to
HK$2,184,000 (US$283,000), which were repaid after year end.

In April 1998, the Company completed an initial public offering in which
it sold 1,460,000 shares of common stock and 1,679,000 warrants. The Company
realized gross proceeds of HK$58,051,000 (US$7,510,000) from this offering.
The Company may realize additional proceeds from the exercise of the
warrants, although there can be no assurance that such warrants will be
exercised. After year end, the Company received gross proceeds of
HK$8,464,000 (US$1,095,000) from the sale of 219,000 shares of Common Stock
pursuant to an over-allotment option granted in the offering.

<PAGE>

The Company anticipates that cash flow from operations, as well as
borrowings available under the Company's existing credit line and gold loan
arrangement, will be sufficient to satisfy the Company's capital needs for
the next twelve months.

RECONCILIATION TO US GAAP

The Company prepares its financial statements under Generally Accepted
Accounting Principles (GAAP) as practiced in Hong Kong (HK GAAP). There are
certain differences between HK GAAP and GAAP as practiced in the United
States (US GAAP). In consideration of US GAAP, certain adjustments would
have been provided.

In connection with the bridge financing associated with the Company's
public offering, the Company was required under SEC accounting rules to
record for US GAAP purposes additional costs associated with the issuance of
156,500 shares of the Company's common stock to the holders of the Promissory
Notes for no additional consideration. The value associated with these
shares is HK$6,049,000 (US$783,000) based on the common stock price
associated with the offering, which was amortized as an additional interest
expense for the period from October 1997 to April 1998. Similar costs are
not expected to be re-occurring in the future.

Under US GAAP, for the fiscal year ended April 30, 1998, HK$547,000
(US$71,000) would be recorded as depreciation expense on investment
properties. Also, certain deferred costs with total amount of HK$898,000
(US$116,000) would be expensed based on US GAAP. In October 1997, the
Company sold an investment property to its major shareholder and recognized a
gain of HK$2,904,000 (US$376,000). Under US GAAP, such gain would be
recorded as a capital contribution while HK$76,000 (US$10,000) in relation to
the depreciation previously charged on this investment property would be
credited as additional income for fiscal 1998. In addition, HK$64,000
(US$8,000) for the amortization of certain offering costs and HK$7,000
(US$1,000) in relation to the amortization of goodwill would also be credited
since the related deferred costs had already been expensed under US GAAP in
the previous year. As a result, net income of the Company for the year ended
April 30, 1998 under US GAAP would be HK$12,205,000 (US$1,578,000).

For the fiscal year ended April 30, 1997, depreciation on investment
properties would be increased by HK$572,000 (US$74,000) and certain deferred
costs with total amount of HK$760,000 (US$98,000) would have been expensed
based on US GAAP. As a result, net income of the Company for the fiscal year
ended April 30, 1997 under US GAAP would be HK$14,389,000 (US$1,862,000).

IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS.

Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income", and Statement of Financial Accounting Standards 131,
"Disclosures About Segments of an Enterprise and Related Information."
Statement 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, Statement 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that displays with the same
prominence as other financial statements. Statement 131 supersedes Statement
of Financial Accounting Standards 14, "Financial Reporting for Segments of a
Business Enterprise". Statement 131 establishes standards on the way that
public companies report financial information about

<PAGE>

operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. Statement 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.

Statements 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
that the standards may have on the future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of these standards.

INFLATION

The Company does not consider inflation to have had a material impact on
its results of operations over the last three years.

FOREIGN EXCHANGE

More than 89% of the Company's sales are denominated in U.S. Dollars
whereas the other sales are basically denominated in Hong Kong Dollars. The
largest portion of the Company's expenses are denominated in Hong Kong
Dollars, followed by U.S. Dollars and Renminbi. The exchange rate of the
Hong Kong Dollar is currently pegged to the U.S. Dollar, but during the past
several years the market exchange rate has fluctuated within a narrow range.
The PRC government principally sets the exchange rate between the Renminbi
and all other currencies. As a result, the exchange rates between the
Renminbi and the U.S. Dollar and the Hong Kong Dollar have fluctuated in the
past and may fluctuate in the future. If the value of the Renminbi or the
Hong Kong Dollar decreases relative to the U.S. Dollar, such fluctuation may
have a positive effect on the Company's results of operations. If the value
of the Renminbi or the Hong Kong Dollar increases relative to the U.S.
Dollar, such fluctuation may have a negative effect on the Company's results
of operations. The Company does not currently hedge its foreign exchange
positions.

YEAR 2000 ISSUE

The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company has been informed by the suppliers of
substantially all of the Company's software that all of those suppliers'
software that is used by the Company is Year 2000 compliant. The software
from these suppliers is used in major areas of the Company's operations such
as for financial, sales, warehousing and administrative purposes. The
Company has no internally generated software. After reasonable
investigation, the Company has not yet identified any Year 2000 problem but
will continue to monitor the issue. However, there can be no assurances that
Year 2000 problem will not occur with respect to the Company's computer
systems. The Year 2000 problem may impact other entities with which the
Company transacts business, and the Company cannot predict the effect of the
Year 2000 problem on such entities.

<PAGE>

BUSINESS

For the past three fiscal years ended April 30, the breakdown of sales
and revenue of the Company (in thousand Hong Kong Dollars) based upon
geographic markets is summarized as follows:

1996 % 1997 % 1998 %
--------- ----- --------- ----- --------- -----
(HK$'000) (HK$'000) (HK$'000)
<S> <C> <C> <C> <C> <C> <C>
USA . . . . . . . . . . . 73,941 84.6 80,481 87.2 111,274 89.6
Hong Kong . . . . . . . . 2,856 3.3 2,020 2.2 7,915 6.4
PRC . . . . . . . . . . . 143 0.2 570 0.6 58 0.0
Japan . . . . . . . . . . 10,378 11.9 9,187 10.0 4,952 4.0
------ ----- ------ ----- ------- -----
87,318 100.0 92,258 100.0 124,199 100.0
------ ----- ------ ----- ------- -----
------ ----- ------ ----- ------- -----

</TABLE>

<PAGE>

BACKGROUND AND ORGANIZATION

The following diagram illustrates the Company's corporate structure.
The respective country of organization/incorporation is shown in brackets.

<TABLE>
<S><C>
LJ INTERNATIONAL INC.
(British Virgin Islands)
|
v
----------------------------------------------------------------------
| | |
v v v
100% 100% 100%
| | |
| | |
v v v
LORENZO JEWELRY MFG. PRECIOUS GEM GOLDEN HORIZON
(H.K.) LTD. TRADING LTD. TRADING LTD.
(Hong Kong) (B.V.I.) (B.V.I.)
| | |
| | |
| 100% 100%
| | |
| v v
100% |--> SHANTOU S.E.Z. LORENZO LORENZO GEMS LORENZO JEWELRY
| GEMS & CRAFT FACTORY (SHENZHEN) CO., LTD. (SHENZHEN) Co., Ltd.
| CO., LTD. (P.R.C.) (P.R.C.)
| (P.R.C.)
|
|
100% |--> SHANTOU LORENZO
| JEWELRY MFG.
| (P.R.C.)
|
|
60% | LORENZO MARKETING
|--> CO., LTD.
(Hong Kong)
</TABLE>

<PAGE>

INDUSTRY OVERVIEW

The jewelry industry is comprised of two major groups that distribute
finished jewelry to retailers in the United States: a small number of
manufacturers that make and distribute their production directly to retailers
and a large number of wholesalers and distributors who purchase products or
portions of products from third parties and resell those items to retailers.
Management believes that vertically integrated companies which control costs
by performing all value added processes enjoy a distinct competitive
advantage over wholesalers and distributors who pay premium acquisition
prices for items that they intend to resell. Management further believes
that large retailers want to rely upon prime manufacturers because they trust
that prime manufacturers are reliable, low cost producers who can accommodate
the large quantities of production that large retailers commonly purchase.

BUSINESS STRATEGY

The Company's business strategy is to increase its market share of
moderately priced high-quality gem-set jewelry by capitalizing on its unique
vertically integrated manufacturing processes to produce high volume,
high-quality products. The Company also intends to further develop its
existing customer relationships with its specialized services and to
aggressively expand into new distribution channels, particularly in the
United States and throughout Western Europe.

The Company is aggressively developing new product lines in exotic
stones, which have high perceived values in semi-precious stones. They
include tanzanite, aquamarine, imperial topaz, green tourmaline, pink
tourmaline and mandarine garnet.

Management also plans to expand into new product categories. The Company
believes that there is an opportunity to manufacture and sell and has begun
test-marketing a brand of sterling silver. These are typically merchandised
with a retail price range of $30.00 to $150.00. The Company will also offer
a new branded collection of cultured pearl jewelry with a retail price range
of $99.00 to $999.00.

MANUFACTURING CAPABILITY

The Company has established two sophisticated factories located in the
PRC that perform stone cutting and polishing and jewelry manufacturing. The
factories are located in the cities of Shantou and Shenzhen in Guangdong
Province. Each manufacturing operation is separated to allow for the
specialized needs of each process. The Shantou facility is the older of the
two facilities. It consists of 26,000 square feet and has been operating for
eight years. The Shenzhen facility has been operating for less than one year
and has 50,000 square feet of manufacturing space. The Company currently
employs over 1,700 skilled gemstone cutters and manufacturing personnel and
is producing over 4 million carats of cut gemstones and 1 million pieces of
finished fine jewelry annually.

The Company imports choice rough gemstone material from mines located in
Africa, China and South America, especially concentrated in Brazil. Gemstone
craftsmen are trained and managed by Hong Kong personnel to insure that the
highest levels of cutting and polishing quality are achieved. The
professional skills possessed by the Company's cutters are applied to a wide
variety of shapes and sizes, maximizing the yield and value of the rough
material that the Company purchases. By performing internally the value
added processes of cutting and polishing, the Company maximizes quality
control and dramatically increases its profitability. The Company
specializes in a wide range of popular and exotic semi-precious gemstones
ranging from amethyst, aquamarine and peridot to tanzanite and tourmaline.

<PAGE>

The Company employs specialized manufacturing processes that deliver
large quantities of high quality finished jewelry. The Company is currently
producing over 60,000 pieces of finished jewelry per month from its two
facilities and employs in excess of 800 skilled craftsmen in jewelry
manufacturing. Each piece of jewelry receives hand made attention, resulting
in fine quality finishing at popular prices.

SALES AND MARKETING

The Company's merchandising strategy is to provide unique and
differentiated products that are enhanced by the favorable pricing that
results from its vertically integrated structure. The Company invests
significant effort in design and model making to produce items which are
distinctly different from its competitors. The Company intends to devote its
effort towards brand development and utilize marketing concepts to enhance
the saleability of its production. The Company recognizes that certain
retail price points are favored by retailers. As part of its product
development strategy, the Company attempts to align its wholesale prices to
match retailers' target prices as a means of achieving these popular price
targets.

The Company's sales and marketing team is located in the Company's
executive offices in Hong Kong. The Company's marketing and distribution
strategy is to identify the strongest retail customers in each distribution
channel and to focus design and sales efforts towards the largest and fastest
growing retailers. The Company maintains a broad base of customers and
concentrates its efforts on five major jewelry market segments: fine jewelers
like Ben Bridge and Carlyle; national jewelry chains like Helzberg and Fred
Meyer; department stores like Macys; electronic retailers like QVC Network,
Inc.; and specialty retailers like Fortunoff's. The Company will introduce
new product divisions selling cultured pearls and sterling silver during the
Fall 1998 season.

The Company's single largest customer is QVC Network, Inc. which
accounted for approximately 55% of the Company's sales during fiscal 1998.
The Company does not sell to QVC Network, Inc. pursuant to any formal or
long-term contracts but only on a purchase order basis. Although the Company
has developed and maintained a good and longstanding relationship with QVC
Network, Inc., the loss of QVC Network, Inc. as a customer or a significant
reduction in its orders would have a materially adverse effect on the
Company.

In addition to its direct sales to QVC Network, Inc. and other
retailers, the Company also sells its products to retailers through
International Jewelry Connection, a national network of independent sales
representatives who sell jewelry through direct contact with retail accounts.
The principal focus of International Jewelry Connection is on major U.S.
department stores and jewelry retailers, who require specialized levels of
marketing, service and training. These sales representatives are paid on a
commission-only basis.

Sales promotion efforts by the Company include attendance by Company
representatives at U.S. and international trade shows and conventions,
including Las Vegas, Orlando, New York, Basel, Switzerland, Hong Kong and
Japan. In addition, the Company actively advertises in trade journals and
related industry publications.

<PAGE>

DESIGN AND PRODUCT DEVELOPMENT

The Company has seven internationally trained designers who work from
the Hong Kong executive office and a growing team of six designers who work
in a designated area within the Shenzhen manufacturing facility. The
PRC-based designers are closely supervised by the Hong Kong design director
and the most experienced Hong Kong design staff. The PRC designers have
already begun to create designs that have been accepted by the Company's
various clients worldwide. The Hong Kong design team attends trade fairs
worldwide to gather product ideas and monitor the latest product trends. The
Company produces over 250 new models per month to support its business growth
objectives.

The Company seeks to provide its customers with a broad selection of
high-quality 10 and 14 karat gold, platinum and sterling silver jewelry
products that incorporate traditional yet fashionable styles and designs.
The Company currently offers approximately 5,000 different styles of rings,
bracelets, necklaces, earrings, pendants and matching sets that are
contemporary and desirable in the market.

The Company studies product trends that are emerging in the
international market and adapts these trends to the needs of its retail
customers. The jewelry offered for sale considers color, fabric and fashion
trends which are projected over a two year period. The Company markets its
products as lifestyle inspired.

MANUFACTURING PROCESS

The Company manufactures its products at its facilities in Shantou and
Shenzhen, PRC. Its manufacturing processes combine vertical integration,
modern technology, mechanization and handcraftsmanship to produce
contemporary and fashionable jewelry. Its manufacturing operations basically
involve cutting and polishing semi-precious gemstones from rough, combining
pure gold, platinum and sterling silver with other metals to produce jewelry,
and finishing operations such as cleaning, polishing and setting, resulting
in high quality finished jewelry.

The Company has developed a process of cost-effectively producing
quality, gem-set jewelry. The Company believes it has a substantial
competitive advantage due to its unique, vertically integrated manufacturing
process. The Company utilizes the lost-wax method of jewelry manufacturing
to produce high-quality gold rings, earrings, pendants and bracelets. This
is based on an investment casting process used in the jewelry manufacturing
industry. It entails creating wax duplicates of the items which are encased
in a plaster mold. The plaster is hardened in an oven while the heat melts
away the wax, leaving a hollow mold which is then injected with gold. After
the casting process, the stones are mounted in the jewelry and the jewelry
undergoes a series of cleaning and polishing stages before being labeled with
the retailer's price tag and bar codes and shipped.

The gem cutting process generally starts with cobbing and sawing of
large rough gemstones into smaller pieces. The gemstones are then preformed
and semi-calibrated to required sizes and shapes. The final procedures
include fine cutting and polishing of the gemstones. The finished faceted
gemstones are then sent to the jewelry factory for assembling. The jewelry
manufacturing process includes waxing, casting, filing (assembling of gold
parts), cleaning, gem setting, trimming and polishing.

The manufacturing process in the jewelry industry results in great
volumes of gold scrap. The Company has strict controls to minimize waste.
Management believes that its manufacturing processes reduce the handling of
the end jewelry product and accordingly, the quantity of jewelry scrap is
greatly

<PAGE>

reduced. The scrap in the form of chips, filings, grindings and sweepings
are recovered by the Company and sent to refiners to recover the gold content.

SUPPLY

The Company manufactures and cuts its own semi-precious stones. The
Company imports most of its rough gemstones from South America, Africa and
the PRC. South America is the major source of ametrine, amethyst,
aquamarine, imperial topaz, tourmaline and white topaz whereas Africa is the
main source of tanzanite, mandarine garnet, garnet aquamarine and topaz. The
Company also imports aquamarine, peridot and topaz from the PRC. The Company
buys the rough gemstones directly from a number of miners based on quality,
pricing and available quantities. The Company believes it has good
relationships with its suppliers, most of whom have supplied the Company for
many years. The stones are either delivered by air or by sea to the Company
depending on volume and types of rough stones.

The Company purchases its gold from banks, gold refiners and commodity
dealers who supply substantially all of its gold needs which management
believes is sufficient to meet the Company's requirements.

Gold acquired for manufacture is at least .995 fine and is combined with
other metals to produce 10 and 14 karat gold. The term "karat" refers to the
gold content of alloyed gold, measured from a maximum of 24 karats (100% fine
gold). Varying quantities of metals such as silver, copper, nickel and zinc
are combined with fine gold to produce 14 karat gold of different colors.
These alloys are in abundant supply and are readily available to the Company.

The Company does not presently engage in hedging activities with respect
to possible fluctuations in the price of gold. The Company believes the risk
of not engaging in such activities is minimal, since the Company purchases
its gold requirements after each significant purchase order is received. The
Company believes that a downward trend in the price of gold would have
little, if any, impact on the valuation of the Company's inventories.

The Company purchases supplies and raw materials from a variety of
suppliers and it does not believe the loss of any of the suppliers would have
a material adverse effect on its business. Alternative sources of supply for
raw materials for production of jewelry are readily available.

SECURITY

The Company has installed certain measures at its Shantou and Shenzhen,
PRC manufacturing as well as its Hong Kong administrative facilities to
protect against loss, including multiple alarm systems, infrared motion
detectors and a system of closed circuit television cameras which provide
surveillance of all critical areas of the Company's premises.

The Company carefully inspects all materials sent and received from
outside suppliers, monitors the location and status of all inventory, and has
strict internal control procedures of all jewelry as it proceeds through the
manufacturing process. A complete physical inventory of gold and gemstones
is taken at the Company's manufacturing and administrative facilities on an
annual basis.

<PAGE>

INSURANCE

The Company maintains primary all-risk insurance, with limits in excess
of the Company's current inventory levels, to cover thefts and damage to
inventory located on the Company's premises. The Company also maintains
insurance covering thefts and damage to Company owned inventory located
off-site. The amount of coverage available under such policies is limited
and may vary by location, but generally is in excess of the value of the gold
and gemstones supplied by the Company. The Company carries transit insurance
which coverage includes the transportation of jewelry outside of the
Company's office.

COMPETITION

The jewelry manufacturing industry is highly competitive, and the
Company's competitors include domestic and foreign jewelry manufacturers,
wholesalers, and importers who may operate on a national, regional and local
scale. The Company's competitive strategy is to provide competitively
priced, high-quality products to the high volume retail jewelry market.
According to management, competition is based on pricing, quality, service
and established customer relationships. The Company believes that it has
positioned itself as a low cost producer without compromising its quality.
The Company's ability to conceive, design and develop products consistent
with the requirements of each retail distribution channel represents a
competitive advantage.

The Company believes that few competitors have the capacity and
manufacturing skill to be effective competitors. Management believes that
its vertically integrated manufacturing capabilities distinguish it from most
of its competitors and enables it to produce very competitively priced, high
quality and consistent products.

In North America, the market, although highly fragmented, does contain a
number of major competitors, many of whom import much of their product from
the Far East and many of whom sell higher priced items. The key United
States competitors include PAJ, Inc., Aurafin, I. Kurgin, Andin International
Inc., Oroamerica, Inc., and Michael Anthony Jewelers Inc. International
competitors include Pranda International and Beauty Gems Limited. Most of
these manufacturers/wholesalers have been successful vendors for many years
and enjoy good relations with their clients. Although it may be difficult for
a newcomer to break into established relationships, the Company already has
made substantial inroads in the North American jewelry market and it believes
it can remain competitive based on its vertically integrated low-cost,
high-volume and high-quality manufacturing process.

EMPLOYEES

At August 1, 1998, the Company employed over 1,500 persons on a
full-time basis, of whom approximately 830 are involved in manufacturing of
jewelry and 610 are engaged in gemstone cutting and polishing. The remaining
60 persons, including the Company's management and executive staff, work in
the Company's Hong Kong office. None of the Company's employees is
represented by a labor union and the Company believes that its employees'
relations are good.

<PAGE>

PROPERTIES

The Company's principal executive offices are located at Units #11 and
#12, 12/F, Block A, Focal Industrial Center, 21 Man Lok Street, Hung Hom,
Kowloon, Hong Kong. The Company owns approximately 4,800 square feet of
office, showroom and manufacturing space at this location.

The Company's first jewelry production facility consists of 10,000
square feet of building space which it owns in the Yubao Industrial Building,
Longhu, Shantou Special Economic Zone, Guangdong Province, PRC. The Company
leases the adjacent 16,000 square feet on the same floor of that building as
one of its gem cutting facilities at a rental rate of HK$24,085 (US$3,116)
per month until July 2002.

The Company's recently completed second production facility in Shenzhen,
PRC consists of 50,000 square feet of building space. This facility is
located in the Shatoujiao Free Trade Zone, Shenzhen. The Company leases this
space from an unaffiliated third party at a rental rate of HK$59,120
(US$7,648) per month until November 2002.

The Company owns two warehouse facilities in Kowloon, Hong Kong
consisting of 5,432 square feet and 2,897 square feet, respectively. The
Company also owns additional properties in Sai Kung, Hong Kong and Aberdeen,
Hong Kong which it leases to non-affiliated third parties.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings, nor are
there any material legal proceedings pending with respect to any property of
the Company, and the Company is not aware of any legal proceedings
contemplated by any governmental authorities involving either the Company or
its property. No director, officer or affiliate of the Company, or any
associate of a director, officer or affiliate of the Company, is an adverse
party in any legal proceedings involving the Company or its subsidiaries, or
has an interest in any such proceeding which is adverse to the Company or its
subsidiaries.

<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Yu Chuan Yih . . . . 59 Chairman of the Board of Directors
Jeffrey W. Taraschi . 46 President, Chief Executive Officer and Director
Ka Man Au . . . . . . 34 Executive Vice President, Secretary and Director
Joseph Tuszer . . . . 52 Vice President--Product Development
Hon Tak Ringo Ng . . 38 Chief Financial Officer
Kui Shing Andy Lai . 49 Non-Executive Director
Lionel C. Wang . . . 42 Non-Executive Director

</TABLE>

None of the directors and officers was selected pursuant to any
agreement or understanding with any other person. There is no family
relationship between any director or executive officer and any other director
or executive officer.

MR. YIH established the business of Lorenzo Jewelry Mfg. (HK) Ltd. and
has served as its President and Managing Director since 1987. Mr. Yih is
primarily responsible for business development and overall Company
management. He has over 20 years of experience in semi-precious stone
production and marketing. Mr. Yih has been a gemstone trader in Brazil and
has extensive experience and relationships in gem sourcing and jewelry
design. Mr. Yih is also president of the Hong Kong branch of the Gemological
Institute of America (GIA), the nonprofit educational organization for the
jewelry industry.

MR. TARASCHI has served as a director of the Company since September
1997 and as President and Chief Executive Officer of the Company since June
1998. He received his Bachelor of Arts degree in economics from Rutgers
University in 1974. From 1986 to 1996, Mr. Taraschi has served in senior
executive positions at Town & Country, QVC Inc. and R.H. Macy Inc. with
responsibilities for business marketing and product development. In December
1996, he formed International Business Partners, a consulting company which
formulates and administers business, marketing and product plans for major
manufacturers and retailers worldwide.

MS. AU has served as a director of Lorenzo Jewelry Mfg. (HK) Ltd. since
its incorporation in 1987. Ms. Au is primarily responsible for the general
administration, human resources, operations and management of the Company.

MR. TUSZER has served as vice president - product development of the
Company since November 1997. From 1989 to 1991, he served as executive vice
president - product development for M. Fabrikant & Sons, New York. From 1992
to 1993, Mr. Tuszer served as a consultant for product development for
William Schneider, Inc., Miami. From 1993 to 1996, he served as vice
president -product development for Samuel Aaron & Sons, New York. Mr. Tuszer
has substantial experience in the jewelry trade, including manufacturing and
production, knowledge of colored stones, product development and marketing.

<PAGE>

MR. NG has served as chief financial officer of the Company since
September 1997. He received his Bachelor of Science degree in civil
engineering from the University of London in 1984 and his Master of Commerce
in Accounting and Commercial Administration from the University of New South
Wales in 1994. From 1992 to 1994, Mr. Ng was employed by Perfect Data Pty.
Ltd. Sydney as a technician. From July 1994 through September 1997, he was
an audit senior with Moores Rowland C.A., Certified Public Accountants. Mr.
Ng is a certified practicing accountant of the Australian Society of CPAs.

MR. LAI has served as a non-executive director of the Company since
September 1997. He received his Bachelor of Arts degree and his Masters of
Business Administration from The Chinese University of Hong Kong. From 1988
to 1992, Mr. Lai served as president of Toplus Development Ltd., a company
engaged in investment and business development. Since 1993, he has served as
president of International Asset Management Ltd., an organization which
focuses on project and business development, investment opportunity and
consultancy services to major corporations in the U.S. and China.

MR. WANG has served as a non-executive director of the Company since
June 1998. He received his Bachelor of Commerce from Tamkung University,
Taipei, Taiwan in 1978, his Master of Business Administration from California
State Polytechnic University in 1980 and his Master of Science from Stanford
University in 1981. From 1984 to 1990, Mr. Wang served as marketing research
analyst and senior strategic planning analyst for The Gillette Company,
Boston, Massachusetts. From 1990 to 1995, he served as associate director
and then director of product development for Information Resources, Inc.,
Waltham, Massachusetts. From 1995 to 1996, Mr. Wang served as vice-president
as Nielsen North America with responsibility for analytical and modeling
projects on Kraft Foods/White Plains account. Since 1996, Mr. Wang has
served as director of analytical services for The NPD Group, Inc., Port
Washington, New York.

AUDIT COMMITTEE

The Board of Directors has established an Audit Committee, which
consists of Messrs. Yih, Lai and Wang. The functions of the Audit Committee
are to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, discuss and review the scope
and the fees of the prospective annual audit and review the results thereof
with the independent public accountants, review and approve non-audit
services of the independent public accountants, review compliance with
existing accounting and financial policies of the Company, review the
adequacy of the financial organization of the Company and review management's
procedures and policies relative to the adequacy of the Company's internal
accounting controls and compliance with federal and state laws relating to
financial reporting.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

The aggregate compensation paid by the Company to all directors and
executive officers of the Company as a group with respect to its fiscal year
ended April 30, 1998 on an accrual basis, for services in all capacities, was
HK$2,582,000 (US$334,000). During the fiscal year ended April 30, 1998, the
Company contributed an aggregate amount of HK$31,000 (US$4,000) toward the
pension plans of the directors and executive officers.

<PAGE>

EXECUTIVE SERVICE CONTRACT

The Company had entered into an employment agreement with Mr. Yu Chuan
Yih effective October 1, 1997 pursuant to which he serves the Company for a
period of three years at an annual salary of HK$1,600,000 (US$207,000). Mr.
Yih's remuneration package includes benefits with respect to a motor car. In
addition, Mr. Yih will be entitled to an annual management bonus of a sum to
be determined by the Board at its absolute discretion having regard for the
operating results of the Company and the performance of Mr. Yih during the
relevant financial year. The amount payable to Mr. Yih will be decided by
majority decision of the members of the Board present in the meeting called
for that purpose, provided that Mr. Yih shall abstain from voting and not be
counted in the quorum in respect of the resolution regarding the amount so
payable to him.

THE 1998 STOCK COMPENSATION PLAN

Effective June 1, 1998, the Board of Directors adopted and approved the
1998 Stock Compensation Plan (the "1998 Plan"). The purpose of the 1998 Plan
is to encourage ownership of the Common Stock of the Company by officers,
directors, employees and advisors of the Company in order to provide
additional incentive for such persons to promote the success and the business
of the Company and to encourage them to remain in the employ of the Company
by providing such persons an opportunity to benefit from any appreciation of
the Common Stock of the Company through the issuance of stock options to such
persons in accordance with the terms of the 1998 Plan. Options granted
pursuant to the 1998 Plan constitute either incentive stock options within
the meaning of Section 422 of the United States Internal Revenue Code of
1986, as amended (the "Code"), or options which constitute nonqualified
options at the time of issuance of such options. The 1998 Plan provides that
incentive stock options and/or nonqualified stock options may be granted to
certain officers, directors, employees and advisors of the Company or its
subsidiaries, if any, selected by the Compensation Committee. Approval of
the 1998 Plan is subject to shareholder approval. If approved, a total of
2,000,000 shares of Common Stock will be authorized and reserved for issuance
under the 1998 Plan, subject to adjustment to reflect changes in the
Company's capitalization in the case of a stock split, stock dividend or
similar event. The 1998 Plan is administered by the Compensation Committee
which has the sole authority to interpret the 1998 Plan and make all
determinations necessary or advisable for administering the 1998 Plan. The
exercise price for any incentive option must be at least equal to the fair
market value of the shares covered thereby as of the date of grant of such
option. Upon the exercise of the option, the exercise price thereof must be
paid in full either in cash, shares of stock of the Company or a combination
thereof. If and to the extent that any option to purchase reserved shares
shall not be exercised by an optionee for any reason or if such option to
purchase shall terminate as provided by the 1998 Plan, such shares which have
not been so purchased thereunder shall again become available for the
purposes of the 1998 Plan unless the 1998 Plan shall have been terminated.

As of this date, the Company has not granted any options under the 1998
Plan.

<PAGE>

CERTAIN TRANSACTIONS

Yu Chuan Yih, President and Chairman of the Company, is a director and
principal shareholder of Gemological Institute of America, Hong Kong Limited;
Italon Limited; Lorenzo Consultant & Investment (China) Limited; and Hong
Kong Brasil Lapidary Limited. During the fiscal years ended April 30, 1996,
1997 and 1998, Mr. Yih and the foregoing affiliated companies received
unsecured advances from, and made unsecured advances to, the Company which
were interest free and repayable on demand. In addition, the Company
purchased gold from Mr. Yih at a fixed price of HK$93/gram. As of April 30,
1996 and 1997, the market price of gold was HK$96.06/gram and HK$84.17/gram,
respectively. Subsequent to the fiscal year ended April 30, 1997, this
arrangement has been terminated. Further, the Company had subcontracted with
Italon Limited for the manufacture of the Company's jewelry pending
completion of the Company's new manufacturing plant. During the fiscal year
ended April 30, 1997, the Company completed construction of its manufacturing
plant in the PRC, and all further subcontracting with Italon Limited was
discontinued thereafter. For further information, please see the Financial
Statements.

During the fiscal year ended April 30, 1998, the Company sold an
investment property to Mr. Yih at its appraised value of HK$3,800,000
(US$492,000), resulting in a gain to the Company of HK$2,904,000
(US$376,000). The sale price of the property was based on a valuation report
prepared by an independent professional property valuer.

<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of September 1, 1998
(i) by each person who is known by the Company to own beneficially more than
10% of the outstanding Common Stock, (ii) by each executive officer and
director of the Company and (iii) by all directors and executive officers as
a group. Except as set forth below, to the knowledge of the Company, the
Company is not directly or indirectly owned or controlled by any other
corporation or by any foreign government.

NUMBER PERCENT
NAME OF BENEFICIAL HOLDER SHARES BENEFICIALLY OWNED
- ------------------------- ------------------- -------
<S> <C> <C>
Yu Chuan Yih . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,787,200(1) 59.5%
Jeffrey W. Taraschi . . . . . . . . . . . . . . . . . . . . . . . . 0
Debora Mu Yong Yih(2) . . . . . . . . . . . . . . . . . . . . . . . 600,000 9.4%
Ka Man Au . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Joseph Tuszer . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Hon Tak Ringo Ng . . . . . . . . . . . . . . . . . . . . . . . . . 0
Kui Shing Andy Lai . . . . . . . . . . . . . . . . . . . . . . . . 0
Lionel C. Wang . . . . . . . . . . . . . . . . . . . . . . . . . . 0
All directors and executive officers as a group (7 persons) . . . . 3,787,200 59.5%

</TABLE>

- ------------------------

(1) Of these shares, 1,500,000 shares are owned of record by Pacific Growth
Developments Ltd., a British Virgin Islands corporation which is owned by
Mr. Yih (60%), his wife Tammy Yih (20%) and an adult daughter, Bianca Tzu
Hsiu Yih (20%). In addition, Mr. Yih is the sole shareholder of the
following three British Virgin Islands corporations which own shares of the
Company as follows: Welgram International Limited--236,000 shares;
Sunflower Gold Holdings Limited--235,000 shares; and Panama Gold Holdings
Limited--235,000 shares.

(2) Debora Mu Yong Yih is an adult daughter of Mr. Yih.

<PAGE>

SELLING SHAREHOLDERS

In addition to the Warrants and the underlying Common Stock being
offered by the Company by this Prospectus, the Company is registering 292,000
shares of Common Stock underlying the Underwriter Warrants on behalf of the
beneficial owners thereof (the "Selling Shareholders"). The Company has
agreed to bear all expenses (other than underwriting or selling commissions
or any fees and disbursements of counsel to the Selling Shareholders) in
connection with the registration of these securities.

The Underwriter Warrants were acquired by the Selling Shareholders in
connection with the Underwriter's acting as the underwriter of the Company's
initial public offering of Common Stock and Warrants. (See "Description of
Securities - Underwriter Warrants.")

The Common Stock underlying the Underwriter Warrants is to be sold from
time to time by or for the account of the following Selling Shareholders,
none of whom are affiliated with the Company nor have been within the past
three years. None of the proceeds from the sale of either the Underwriter
Warrants or the Common Stock underlying them will be received by the Company.
The Selling Shareholders will pay all brokerage discounts or commissions
attributable to the sale for their account. The Company is not aware of any
existing agreement with any broker with respect to the sale of the
Underwriter Warrants or underlying Common Stock.

The following table sets forth the name of each Selling Shareholder and
the number of shares of Common Stock to be offered for each Selling
Shareholder's account.

NAME NUMBER OF SHARES OF COMMON STOCK
---- --------------------------------
<S> <C>
Robert T. Kirk 232,800
Marie Lima 10,000
Michael Morrisett 10,000
Brian Herman 10,000
David A. Carter 14,600
Wendy Tand Gusrae 14,600
-------
TOTAL 292,000

</TABLE>

The sale of these securities may be effected from time to time in
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Common Stock, or a combination of such methods of sale, at fixed prices which
may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Shareholders may effect such transactions by
selling the securities directly to purchasers or to or through broker-dealers
which may act as agents or principals. Such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Shareholders and/or the purchasers of the securities for which such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Shareholders and any broker-dealers that
act in connection with the sale of the securities might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act.

<PAGE>

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, $0.01 par value per share, of which 6,365,646 shares are
outstanding.

Holders of Common Stock are entitled to one vote for each whole share on
all matters to be voted upon by shareholders, including the election of
directors. Holders of Common Stock do not have cumulative voting rights in
the election of directors. All shares of Common Stock are equal to each
other with respect to liquidation and dividend rights. Holders of Common
Stock are entitled to receive dividends if and when declared by the Company's
Board of Directors out of funds legally available under British Virgin
Islands law. In the event of the liquidation of the Company, all assets
available for distribution to the holders of Common Stock are distributable
among them according to their respective holdings. Holders of Common Stock
have no preemptive rights to purchase any additional, unissued shares of
Common Stock. All the outstanding Common Stock is, and the Common Stock
offered by this Prospectus will be, when issued against the consideration set
forth in this Prospectus, duly authorized, validly issued, fully paid and
nonassessable.

WARRANTS

The following is a brief summary of certain provisions of the Warrants,
but such summary does not purport to be complete and is qualified in all
respects by reference to the actual text of the Warrant Agreement between the
Company and American Securities Transfer & Trust, Incorporated (the "Transfer
and Warrant Agent"). A copy of the Warrant Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
See "Additional Information."

EXERCISE PRICE AND TERMS. Each Warrant entitles the holder thereof to
purchase, at any time from the Effective Date through the fifth anniversary
of the Effective Date, one share of Common Stock at a price of $5.75 per
share, after which date the Warrants will expire, subject to adjustment in
accordance with the anti-dilution and other provisions referred to below.

The holder of a Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Transfer and Warrant Agent, with
the subscription form on the reverse side of such certificate properly
completed and executed, together with payment of the exercise price. The
Warrants may be exercised at any time in whole or in part at the applicable
exercise price until expiration of the Warrants five years from the Effective
Date. No fractional shares will be issued upon the exercise of the Warrants.

The Warrants are subject to redemption by the Company, at the option of
the Company, at $0.25 per Warrant, upon 30 days' prior written notice, if the
closing bid price, as reported on the Nasdaq National Market, or the closing
sale price, as reported on a national or regional securities exchange, as
applicable, of the shares of the Common Stock for 30 consecutive trading days
ending within ten days of the notice of redemption of the Warrants averages
in excess of $10.00 per share, subject to adjustment. The Company is
required to maintain an effective registration statement with respect to the
Common Stock underlying the Warrants prior to redemption of the Warrants.
Prior to the first anniversary of the Effective Date, the Warrants will not
be redeemable by the Company without the written consent of the

<PAGE>

Underwriter. In the event the Company exercises the right to redeem the
Warrants, such Warrants will be exercisable until the close of business on
the date for redemption fixed in such notice. If any Warrant called for
redemption is not exercised by such time, it will cease to be exercisable and
the holder will be entitled only to the redemption price. Redemption of the
Warrants could force the Warrant holders either to (i) exercise the Warrants
and pay the exercise price thereof at a time when it may be less advantageous
economically to do so, or (ii) accept the redemption price in consideration
for cancellation of the Warrant, which could be substantially less than the
market value thereof at the time of redemption.

The exercise price of the Warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.

The Company has authorized and reserved for issuance a sufficient number
of shares of Common Stock to permit the exercise of all Warrants to be issued
in this Offering. All shares of Common Stock issued upon exercise of the
Warrants, if exercised in accordance with their terms, will be fully paid and
non-assessable.

ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification of the Common Stock, or sale by the Company
of shares of its Common Stock (or other securities convertible into or
exercisable for Common Stock) at a price per share or share equivalent below
the then-applicable exercise price of the Warrants or the then-current market
price of the Common Stock. Additionally, an adjustment would be made in the
case of a reclassification or exchange of Common Stock, consolidation or
merger of the Company with or into another corporation, or sale of all or
substantially all of the assets of the Company, in order to enable Warrant
holders to acquire the kind and number of shares of stock or other securities
or property receivable in such event by a holder of that number of shares of
Common Stock that would have been issued upon exercise of the Warrant
immediately prior to such event. No adjustments will be made until the
cumulative adjustments in the exercise price per share amount to $.05 or
more. No adjustment to the exercise price of the shares subject to the
Warrants will be made for dividends (other than stock dividends), if any,
paid on the Common Stock or upon exercise of the Warrants, the Underwriter
Warrants or any other options or warrants outstanding as of the date of this
Prospectus.

TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time prior to their expiration date five years from the
Effective Date, at which time the Warrants become wholly void and of no
value. If a market for the Warrants develops, the holder may sell the
Warrants instead of exercising them. There can be no assurance, however,
that a market for the Warrants will develop or continue. If the Company is
unable to qualify for sale in particular states the Common Stock underlying
the Warrants, holders of the Warrants residing in such states and desiring to
exercise the Warrants will have no choice but to sell such Warrants or allow
them to expire.

WARRANT HOLDER NOT A SHAREHOLDER. The Warrants do not confer upon holders
any dividend, voting, preemptive or any other rights as shareholders of the
Company.

<PAGE>

UNDERWRITER WARRANTS

The Company issued to the Underwriter and/or persons related to the
Underwriter, for nominal consideration, the Common Stock Underwriter Warrants
to purchase up to 146,000 shares of Common Stock (the "Underlying Shares")
and the Warrant Underwriter Warrants to purchase up to 146,000 warrants (the
"Underwriter Underlying Warrants"). The Common Stock Underwriter Warrants,
the Warrant Underwriter Warrants and the Underwriter Underlying Warrants are
sometimes referred to in this Prospectus as the "Underwriter Warrants." The
Common Stock Underwriter Warrants and the Warrant Underwriter Warrants are
exercisable for a five-year period commencing on the Effective Date. The
initial exercise price of each Common Stock Underwriter Warrant is $8.25 per
Underlying Share. The initial exercise price of each Warrant Underwriter
Warrant is $.20625 per Underwriter Underlying Warrant. Each Underwriter
Underlying Warrant is exercisable for a five-year period commencing on the
Effective Date to purchase one share of Common Stock at an exercise price of
$8.25 per share of Common Stock. The Underwriter Warrants are restricted
from sale, transfer, assignment, or hypothecation for a period of twelve
months from the Effective Date by the holder, except (i) to officers of the
Underwriter and members of the selling group and officers and partners
thereof; (ii) by will; or (iii) by operation of law.

The Common Stock Underwriter Warrants and the Warrant Underwriter
Warrants contain provisions providing for appropriate adjustment in the event
of any merger, consolidation, recapitalization, reclassification, stock
dividend, stock split or similar transaction. The Underwriter Warrants
contain net issuance provisions permitting the holders thereof to elect to
exercise the Underwriter Warrants in whole or in part and instruct the
Company to withhold from the securities issuable upon exercise, a number of
securities, valued at the current fair market value on the date of exercise,
to pay the exercise price. Such net exercise provision has the effect of
requiring the Company to issue shares of Common Stock without a corresponding
increase in capital. A net exercise of the Underwriter Warrants will have
the same dilutive effect on the interests of the Company's shareholders as
will a cash exercise. The Underwriter Warrants do not entitle the holders
thereof to any rights as a shareholder of the Company until such Underwriter
Warrants are exercised and shares of Common Stock are purchased thereunder.

The Underwriter Warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of
the Securities Act. The Company has agreed that if it shall cause a
post-effective amendment, a new registration statement, or similar offering
document to be filed with the Commission, the holders shall have the right,
for seven (7) years from the Effective Date, to include in such registration
statement or offering statement the Underwriter Warrants and/or the
securities issuable upon their exercise at no expense to the holders.
Additionally, the Company has agreed that, upon request by the holders of 50%
or more of the Underwriter Warrants during the period commencing one year
from the Effective Date and expiring four years thereafter, the Company will,
under certain circumstances, register the Underwriter Warrants and/or any of
the securities issuable upon their exercise.

TRANSFER AND WARRANT AGENT

The transfer agent for the Common Stock and the warrant agent for the
Warrants is American Securities Transfer & Trust, Incorporated, Denver,
Colorado.

<PAGE>

EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SHAREHOLDERS

There are no material British Virgin Islands laws that impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest or other payments to nonresident holders of the Company's capital
stock. British Virgin Islands law and the Company's Memorandum of
Association and Articles of Association impose no limitations on the right of
nonresident or foreign owners to hold or vote the Common Stock.

DIFFERENCES IN CORPORATE LAW

While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively (i.e., in the name of and for the benefit of the
Company) and to sue the company and its directors for his benefit and for the
benefit of others similarly situated, the circumstances in which any such
action may be brought, and the procedures and defenses that may be available
in respect of any such action, may result in the rights of shareholders of a
BVI company being more limited than those of shareholders of a company
organized in the US.

Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Company's Memorandum of
Association or Articles of Association or an increase or reduction in the
Company's authorized capital, which would require shareholder approval under
the laws of most US jurisdictions. In addition, the directors of a BVI
corporation, subject in certain cases to court approval but without
shareholder approval, may, among other things, implement a reorganization,
certain mergers or consolidations, the sale, transfer, exchange or
disposition of any assets, property, part of the business, or securities of
the corporation, or any combination thereof, if they determine it is in the
best interests of the corporation, its creditors, or its stockholders.

As in most US jurisdictions, the board of directors of a BVI corporation
is charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, pursuant to which directors must
properly apprise themselves of all reasonably available information, and a
duty of loyalty, pursuant to which they must protect the interests of the
corporation and refrain from conduct that injures the corporation or its
stockholders or that deprives the corporation or its stockholders of any
profit or advantage. Many US jurisdictions have enacted various statutory
provisions which permit the monetary liability of directors to be eliminated
or limited. Under BVI law, liability of a corporate director to the
corporation is primarily limited to cases of willful malfeasance in the
performance of his duties or to cases where the director has not acted
honestly and in good faith and with a view to the best interests of the
corporation. However, under its Articles of Association, the Company will be
authorized to indemnify any director or officer who is made or threatened to
be made a party to a legal or administrative proceeding by virtue of being a
director or officer of the Company, provided such person acted honestly and
in good faith and with a view to the best interests of the Company and, in
the case of a criminal proceeding, such person had no reasonable cause to
believe that his conduct was unlawful. The Company's Articles of Association
also enable the Company to indemnify any director or officer of the Company
who was successful in such a

<PAGE>

proceeding against expense and judgments, fines and amounts paid in
settlement and reasonably incurred in connection with the proceeding.

The foregoing description of certain differences between BVI and US
corporate laws is only a summary and does not purport to be complete or to
address every applicable aspect of such laws. However, the Company believes
that all material differences are disclosed above.

SHARES ELIGIBLE FOR FUTURE SALE

Officers, directors and shareholders of the Company holding an aggregate
of 4,387,200 of the outstanding shares of Common Stock have agreed not to
sell (i.e., they have agreed to "lock up") such Common Stock for 24 months
from and after the Effective Date. Of the Company's 6,365,646 shares of
Common Stock outstanding, 4,426,835 shares are "restricted securities", as
that term is defined under Rule 144 of the Securities Act. Restricted
securities may be sold in open market transactions in compliance with Rule
144, if the conditions of such rule are satisfied. Under Rule 144 as
currently in effect, any person (or persons whose shares are aggregated) who
has beneficially owned restricted shares for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock (63,656
shares immediately after this Offering) or (ii) the average weekly trading
volume during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the Commission. Sales pursuant to Rule 144
also are subject to certain requirements relating to the manner of sale,
notice and availability of current public information regarding the Company.
Under Rule 144(k), a person (or persons whose shares are aggregated) who is
not deemed an affiliate of the Company at any time during the 90 days
immediately preceding the sale and whose restricted shares have been fully
paid for two years since the later of the date they were acquired from the
Company or the date they were acquired from an affiliate of the Company may
sell such restricted shares under Rule 144(k) without regard to the
limitations described above.

Sales of substantial amounts of Common Stock under Rule 144 or
otherwise, or even the potential of such sales, could depress the market
price of the Common Stock, and could impair the Company's ability to raise
capital through the sale of its equity securities.

<PAGE>

TAXATION

The following is a summary of certain anticipated material U.S. federal
income and British Virgin Islands tax consequences of an investment in the
Common Stock. The summary does not deal with all possible tax consequences
relating to an investment in the Common Stock and does not purport to deal
with the tax consequences applicable to all categories of investors, some of
which (such as dealers in securities, insurance companies and tax-exempt
entities) may be subject to special rules. In particular, the discussion
does not address the tax consequences under state, local and other national
(e.g., non-U.S. and non-British Virgin Islands) tax laws. Accordingly, each
prospective investor should consult its own tax advisor regarding the
particular tax consequences to it of an investment in the Common Stock. The
following discussion is based upon laws and relevant interpretations thereof
in effect as of the date of this Prospectus, all of which are subject to
change.

UNITED STATES FEDERAL INCOME TAXATION

The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person (i.e., a U.S. citizen or resident, a U.S.
corporation, or an estate or trust subject to U.S. federal income tax on all
of its income regardless of source) making an investment in the Common Stock
(a "U.S. Investor"). For taxable years beginning after December 31, 1996, a
trust will be a U.S. person only if (i) a court within the United States is
able to exercise primary supervision over its administration and (ii) one or
more United States persons have the authority to control all of its
substantial decisions. In addition, the following discussion does not address
the tax consequences to a person who holds (or will hold), directly or
indirectly, 10% or more of the Common Stock (a "10% Shareholder"). Non-U.S.
persons and 10% Shareholders are advised to consult their own tax advisors
regarding the tax considerations incident to an investment in the Common
Stock.

A U.S. Investor receiving a distribution with respect to the Common
Stock will be required to include such distribution in gross income as a
taxable dividend, to the extent of the Company's current or accumulated
earnings and profits as determined under U.S. federal income tax principles.
Any distributions in excess of such earnings and profits of the Company will
first be treated, for U.S. federal income tax purposes, as a nontaxable
return of capital, to the extent of the U.S. Investor's adjusted tax basis in
the Common Stock, and then as gain from the sale or exchange of a capital
asset, provided that the Common Stock constitutes a capital asset in the
hands of the U.S. Investor. U.S. corporate shareholders will not be entitled
to any deduction for distributions received as dividends on the Common Stock.

Gain or loss on the sale or exchange of the Common Stock will be treated
as capital gain or loss if the Common Stock is held as a capital asset by the
U.S. Investor. Such capital gain or loss will be long-term capital gain or
loss if the U.S. Investor has held the Common Stock for more than one year at
the time of the sale or exchange, and will be taxed at the lowest rates
applicable to capital gains if the U.S. Investor has held the Common Stock
for more than eighteen months at such time.

A holder of Common Stock may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Common Stock if such
dividends are paid by a paying agent, broker or other intermediary in the
United States or by a U.S. broker or certain United States-related brokers to
such holder outside the United States. In addition, the proceeds of the
sale, exchange or redemption of

<PAGE>

Common Stock may be subject to backup withholding, if such proceeds are paid
by a paying agent, broker or other intermediary in the United States.

Backup withholding may be avoided by the holder of Common Stock if such
holder (i) is a corporation or comes within certain other exempt categories
or (ii) provides a correct taxpayer identification number, certifies that
such holder is not subject to backup withholding and otherwise complies with
the backup withholding rules. In addition, holders of Common Stock who are
not U.S. persons ("non-U.S. holders") are generally exempt from backup
withholding, although such holders may be required to comply with
certification and identification procedures in order to prove their
exemption.

Any amounts withheld under the backup withholding rules from a payment
to a holder will be refunded (or credited against the holder's U.S. federal
income tax liability, if any) provided that amount withheld is claimed as
federal taxes withheld on the holder's U.S. federal income tax return
relating to the year in which the backup withholding occurred. A holder who
is not otherwise required to file a U.S. income tax return must generally
file a claim for refund (or, in the case of non-U.S. holders, an income tax
return) in order to claim refunds of withheld amounts.

BRITISH VIRGIN ISLANDS TAXATION

Under the International Business Companies Act of the British Virgin
Islands ("BVI") as currently in effect, a holder of Common Stock who is not a
resident of the BVI is exempt from BVI income tax on dividends paid with
respect to the Common Stock and all holders of Common Stock are not liable to
BVI income tax on gains realized during that year on sale or disposal of such
shares; the BVI does not impose a withholding tax on dividends paid by a
company incorporated under the International Business Companies Act.

There are no capital gains, gift or inheritance taxes levied by the BVI
on companies incorporated under the International Business Companies Act. In
addition, the Common Stock is not subject to transfer taxes, stamp duties or
similar charges.

There is no income tax treaty or convention currently in effect between
the United States and the BVI.

<PAGE>

PLAN OF DISTRIBUTION

In connection with the solicitation of Warrant exercises, unless granted
an exemption by the Commission from its Rule 10b-6, the Underwriter and any
other soliciting broker-dealer will be prohibited from engaging in any
market-making activities with respect to the Company's securities for the
period commencing either two or nine business days (depending on the market
price of the Common Stock) prior to any solicitation activity for the
exercise of Warrants until the later of (i) the termination of such
solicitation activity, or (ii) the termination (by waiver or otherwise) of
any right which the Underwriter or any other soliciting broker-dealer may
have to receive a fee for the exercise of Warrants following such
solicitation. As a result, the Underwriter or any other soliciting
broker-dealer may be unable to provide a market for the Company's securities,
should they desire to do so, during certain periods while the Warrants are
exercisable.

LEGAL MATTERS

Certain legal matters have been passed upon for the Company as to U.S.
law by Andrew N. Bernstein, P.C., Greenwood Village, Colorado. The validity
of the shares of Common Stock and the Warrants offered by this Prospectus and
certain other legal matters have been passed on for the Company by Harney
Westwood & Riegels as to British Virgin Islands law.

EXPERTS

The audited consolidated financial statements of the Company and its
subsidiaries as of April 30, 1997 and 1998 and for each of the three years
ended April 30, 1998 included in this Prospectus have been audited by Moores
Rowland, Hong Kong, independent public accountants, as indicated in their
report with respect thereto, and are included in reliance upon the authority
of said firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Commission, in Washington, D.C., a
Registration Statement on Form F-1 under the Securities Act with respect to
the Warrants, the Underwriter Warrants and the underlying shares of Common
Stock being offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. Statements in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance where
such contract or other document is an exhibit to the Registration Statement,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement. Although all material terms of the
respective contracts or other documents are set forth with such statements,
each statement is qualified in its entirety by reference to the relevant
exhibit.

The Company is subject to the informational requirements of the Exchange
Act as they apply to a foreign private issuer, and in accordance therewith is
required to file reports and other information with the Commission. As a
foreign private issuer, the Company is exempt under the Exchange Act from,
among other things, the rules prescribing the furnishing and content of proxy
statements and annual reports to shareholders, and the Company's officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions set forth in Section 16 of the
Exchange Act. In addition, the Company is not required under the Exchange Act
to file periodic reports and financial

<PAGE>

statements with the Commission as frequently or as promptly as United States
companies whose securities are registered under the Exchange Act.

The Registration Statement, including all exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60601 upon payment of prescribed rates.

<PAGE>

LJ INTERNATIONAL INC.

REPORTS AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED

30TH APRIL 1998

<PAGE>

LJ INTERNATIONAL INC.

INDEX TO FINANCIAL STATEMENTS

Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2

Consolidated statements of operations for the years ended April 30, 1996, 1997 and 1998
F-3

Consolidated balance sheets as of April 30, 1997 and 1998 F-4

Consolidated statements of shareholders' equity for the years ended
April 30, 1996, 1997 and 1998 F-5

Consolidated statements of cash flows for the years ended April 30, 1996, 1997 and 1998 F-6

Notes to and forming part of the financial statements F-7 - F-29

</TABLE>

F-1

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of
LJ International Inc.

We have audited the accompanying consolidated balance sheets of
LJ International Inc. and its subsidiaries (the Company) as of April 30, 1997
and 1998 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three year period ended
April 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in Hong Kong which do not differ in any material respect from those in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements, prepared on the
basis of presentation as set out in notes 1 and 2 to the financial statements,
present fairly, in all material respects, the consolidated financial position of
the Company as of April 30, 1997 and 1998 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
April 30, 1998, in conformity with accounting principles generally accepted in
Hong Kong (which differ in certain material respects from generally accepted
accounting principles in the United States - See note 15).

/s/ Moores Rowland

MOORES ROWLAND
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS, HONG KONG

Dated: 31 AUG 1998

F-2

<PAGE>

LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998

(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended April 30
-------------------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Operating revenue 87,318 92,258 124,199 16,067
Costs of goods sold (55,895) (48,053) (63,293) (8,188)
--------- --------- --------- ---------

Gross profit 31,423 44,205 60,906 7,879

Selling, general and administrative
Expenses (19,433) (23,657) (33,545) (4,340)
--------- --------- --------- ---------
Operating income 11,990 20,548 27,361 3,539
Other income and expenses:
Net interest expenses (5,693) (3,999) (6,964) (901)
Rental income, net 1,824 1,280 1,273 165
Minority interests 14 102 2 -
Gain on disposal of land and building
to related party - - 2,904 376
--------- --------- --------- ---------
Income before income taxes 8,135 17,931 24,576 3,179
Income taxes (620) (2,210) (2,120) (274)
--------- --------- --------- ---------
Net income 7,515 15,721 22,456 2,905
--------- --------- --------- ---------
--------- --------- --------- ---------

Earnings per share - Basic 1.71 3.58 4.95 0.64
--------- --------- --------- ---------
--------- --------- --------- ---------

Weighted average number of shares
Outstanding - Basic 4,387,200 4,387,200 4,539,128 4,539,128
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>

LJ INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1997 AND 1998

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
As of April 30
------------------------------------------------------
1997 1998 1998
---- ---- ----
Notes HK$ HK$ US$
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents 296 10,752 1,391
Restricted cash 3,036 3,111 402
Accounts receivable, net of HK$798 allowance
for doubtful accounts as of April 30, 1997 and 1998 8,453 31,068 4,019
Inventories 2(e) 37,193 46,994 6,079
Prepayments and other current assets 724 549 71
------ ------- ------
TOTAL CURRENT ASSETS 49,702 92,474 11,962
Property, plant and equipment, net 4 8,319 30,021 3,884
Investment properties, net 21,580 28,150 3,642
Due from related parties 9 1,795 2,655 343
Deferred offering cost 601 - -
Organization costs, net 805 1,245 161
Goodwill 75 68 9
Other investments 2 3 1
------ ------- ------
TOTAL ASSETS 82,879 154,616 20,002
------ ------- ------
------ ------- ------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Bank overdraft 8,639 1,049 136
Notes payable, current portion 5 7,854 4,158 538
Letters of credit and gold loan 23,998 22,305 2,886
Promissory notes - 2,184 283
Accounts payable 7,514 18,873 2,441
Accrued expenses 1,219 1,266 164
Due to related party 9 - 48 6
Capitalized lease obligations, current 6 405 429 55
Income taxes payable 2,830 3,072 397
------ ------- ------
TOTAL CURRENT LIABILITIES 52,459 53,384 6,906

Notes payable, non-current portion 5 12,008 9,689 1,253
Capitalized leased obligations, non-current 6 998 855 111
------ ------- ------
TOTAL LIABILITIES 65,465 63,928 8,270
------ ------- ------
------ ------- ------
Minority interests 433 431 56
------ ------- ------
SHAREHOLDERS' EQUITY
Common stocks, par value US$0.01 each, authorized - 100 million shares,
issued and outstanding -
4,387,200 shares as of April 30, 1997,
6,146,646 shares as of April 30, 1998 8 339 475 61
Share premium 8 - 41,597 5,381
Warrant reserve 8 - 1,622 210
Investment properties revaluation reserve - 7,465 966
Retained earnings 16,642 39,098 5,058
------ ------- ------
TOTAL SHAREHOLDERS' EQUITY 16,981 90,257 11,676
------ ------- ------
------ ------- ------

TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY 82,879 154,616 20,002
------ ------- ------
------ ------- ------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998

(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>

Investment
Common stock Retained properties
------------ earnings Share Warrant revaluation
Shares Par value (deficit) premium reserve reserve Total Total
------ --------- --------- ------- ------- ----------- ----- -----
HK$ HK$ HK$ HK$ HK$ HK$ US$

<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of May 1, 1995 4,387,200 339 (4,094) - - - (3,755) (486)
Net income - - 7,515 - - - 7,515 972
Dividend - - (2,500) - - - (2,500) (323)
--------- --- ------ ------ ----- ----- ------ ------

Balance as of April 30,
1996 4,387,200 339 921 - - - 1,260 163
Net income - - 15,721 - - - 15,721 2,034
--------- --- ------ ------ ----- ----- ------ ------

Balance as of April 30,
1997 4,387,200 339 16,642 - - - 16,981 2,197
New issue of shares 1,460,000 113 - 41,620 - - 41,733 5,398
Shares issued in Deen
merger 142,946 11 - (11) - - - -
Shares issued to note
holders 156,500 12 - (12) - - - -
New issue of warrants - - - - 1,622 - 1,622 210
Surplus arising on
revaluation - - - - - 7,465 7,465 966
Net income - - 22,456 - - - 22,456 2,905
--------- --- ------ ------ ----- ----- ------ ------

Balance as of April 30,
1998 6,146,646 475 39,098 41,597 1,622 7,465 90,257 11,676
--------- --- ------ ------ ----- ----- ------ ------
--------- --- ------ ------ ----- ----- ------ ------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5

<PAGE>

LJ INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
The accompanying notes are an integral part of these financial statements.

(Dollars in thousands, except per share amounts)

Year Ended April 30
------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 7,515 15,721 22,456 2,905
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:-
Depreciation of property, plant and 928 1,049 1,345 174
equipment
Provision for slow moving inventory 160 (60) - -
Amortization of deferred expenditures 10 10 85 11
Amortization of goodwill - - 7 1
Loss on disposal of fixed assets - 119 - -
Gain on disposal of land and building - - (2,904) (376)
Bad debt 866 1,295 - -
Minority interests (14) (102) (2) -
Changes in operating assets and liabilities:
Accounts receivable, net 8,380 (3,994) (22,615) (2,925)
Inventories (4,397) (11,316) (9,801) (1,268)
Prepayments and other current assets 373 230 175 23
Due from related parties (1,483) (1,612) (860) (111)
Accounts payable (5,502) 1,409 11,359 1,469
Accrued expenses (1,016) (583) 47 6
Letters of credit (4,804) (599) (1,127) (146)
Due to related parties 79 (2,462) 48 6
Income tax receivables (46) 46 - -
Income tax payables 491 2,210 242 31
--------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 1,540 1,361 (1,545) (200)
--------- ---------- ---------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Organization costs - (746) (525) (68)
Purchase of fixed assets (1,899) (588) (22,728) (2,940)
Proceeds on disposals of fixed assets - 100 3,800 492
Purchase of bonds (1) (1) (1) -
--------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (1,900) (1,235) (19,454) (2,516)
--------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs - (601) (14,095) (1,822)
Bank overdrafts 294 (44) (7,590) (982)
Dividend paid (2,500) - - -
Net proceeds from issue of shares/warrants - - 58,051 7,509
Net proceeds from sale of promissory notes - - 2,184 283
Loan acquired 14,186 4,021 1,434 185
Repayment of loan (9,126) (2,858) (8,016) (1,037)
Repayment of capitalized leases - - (438) (57)
Restricted cash (2,000) (1,036) (75) (10)
--------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 854 (518) 31,455 4,069
--------- ---------- ---------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 494 (392) 10,456 1,353
CASH AND CASH EQUIVALENTS, AS OF BEGINNING OF YEAR 194 688 296 38
--------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS, AS OF END OF YEAR 688 296 10,752 1,391
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------

ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cash and equivalents 688 296 10,752 1,391
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------

OTHER CASH TRANSACTIONS:
Cash paid for interest 5,723 4,137 7,176 928
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------

Cash paid(refunded) for taxes 174 (46) 1,877 243
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
NON-CASH TRANSACTIONS:
Purchase of equipment under capitalized leases - 1,403 320 41
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------

The accompanying notes are an integral part of these financial statements.
</TABLE>

<PAGE>

LJ INTERNATIONAL INC.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS

LJ International Inc. and its subsidiaries (Company) are
involved in the design, manufacture , marketing and sale of
semi-precious gemstones jewelry. While the Company is based in Hong
Kong, its manufacturing operations are in the People's Republic of
China (PRC) and most of its sales are currently in the United States.
The Company also owns certain commercial and residential properties
located in Hong Kong, which are held primarily for investment purposes.

During the year, LJ International Inc. (LJI) merged with
Lorenzo Jewelry Mfg. (H.K.) Limited (Lorenzo). LJI was incorporated as
a British Virgin Islands (BVI) Company on January 30, 1997 and prior to
the merger it had no significant operations, but had incurred certain
organization and deferred offering costs. The merger has been accounted
for by the purchase method of accounting under HK GAAP and reflects
operations for each period presented herein on the basis that the
merger took place at April 30, 1994. In connection with this
reorganization, HK$75,000 was recorded as goodwill. Under US GAAP such
reorganization would be accounted for as if it were a pooling of
interest as there exists common ownership between the companies. A
reconciliation to this method of accounting is set out in note 15. The
capital structure reflected in the financial statements is that of LJI,
which is holding company after the merger.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF ACCOUNTING
The financial statements are presented in Hong Kong dollars and
have been prepared in accordance with the requirements of the Hong
Kong Companies Ordinance and the accounting principles generally
accepted in Hong Kong which have been applied consistently
throughout the relevant periods. These requirements differ in
certain material respects from generally accepted accounting
principles in the United States (US GAAP) - see note 15.

The financial statements have been prepared under the historical
cost convention. Cost in relation to assets represents the cash
amount paid, the fair value of the asset or the shares given in
exchange, as appropriate.

(b) PRINCIPLES OF COMBINATION AND CONSOLIDATION

The consolidated financial statements include the financial
information of LJI and Lorenzo, Precious Gems Trading Limited
(Precious Gems) & Golden Horizon Trading Limited (Golden
Horizon). Lorenzo has three subsidiaries, two of which are
incorporated in the PRC, Shantou Lorenzo Jewelry Mfg. (Shantou
Lorenzo Jewelry) and Shantou S.E.Z. Lorenzo Gems & Craft Factory
Co., Ltd. (Shantou Lorenzo Gems). Lorenzo also has a 60% owned
subsidiary, Lorenzo Marketing Co., Limited which is incorporated
in Hong Kong. Precious Gems is incorporated in BVI and has one
subsidiary which is incorporated in the PRC, Lorenzo Gems
Manufacturing (Shenzhen) Co. Ltd. Golden Horizon is incorporated
in BVI and has one subsidiary which is incorporated in the PRC,
Lorenzo Jewellery (Shenzhen) Co. Ltd.

F-7

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(b) PRINCIPLES OF COMBINATION AND CONSOLIDATION (CONTINUED)

The consolidated financial statements have been prepared on the
assumption that the current corporate structure was in existence
throughout the relevant periods where applicable after making such
adjustments as were considered necessary.

The results of subsidiaries acquired or disposed of during the
year are consolidated from or to their effective dates of
acquisition or disposal respectively.

All material intercompany balances and transactions have been
eliminated on consolidation.

(c) GOODWILL ON CONSOLIDATION
Goodwill arising on consolidation being the excess of the purchase
consideration payable at the time of acquisition of the
subsidiaries over the fair values of the net underlying assets
acquired, is amortized over a period of 10 years commencing from
the year of acquisition.

(d) STATEMENT OF CASH FLOWS
For the purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with an original
maturity within three months or less to be cash equivalents.

(e) INVENTORIES
Inventories are stated at the lower of cost or net realizable
value. Cost includes cost of purchase of materials, determined
generally on the first-in, first-out basis, and in the case of
work in progress and finished goods, direct labour and an
appropriate proportion of production overheads. Net realizable
value is determined on the basis of anticipated sales proceeds
less estimated selling expenses or management estimates on
prevailing market conditions. Inventories consisted of the
following:

As of April 30
-------------------------------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>

Raw materials 22,442 22,140 2,864
Work-in-progress 7,211 14,281 1,847
Finished goods 8,740 11,773 1,523
Less: Provision for slow moving stocks (1,200) (1,200) (155)
----------- ----------- -----------
37,193 46,994 6,079
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

F-8

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(e) INVENTORIES (CONTINUED)

Work-in-progress consists primarily of cut-stones, which generally
could be sold to third parties, however, it is the Company's
intent to manufacture these stones into finished jewelry.

(f) FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation. The
cost of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present working
condition and location for its intended use. Expenditure incurred
after the fixed assets have been put into operation, such as
repairs and maintenance, is charged to the profit and loss account
in the period in which it is incurred. In situations where it can
be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained
from the use of the fixed assets, the expenditure is capitalized.

When assets are sold or retired, their costs or valuation and
accumulated depreciation are removed from the accounts and any
gain or loss resulting from their disposal is included in the
profit and loss account.

Depreciation is calculated on a straight line method at the
following annual rates:

<TABLE>
<CAPTION>
Land and buildings 2% or over the unexpired term of leases
<S> <C>
Furniture, fixtures and equipment 20%
Motor vehicles 20%
Plant and machineries 10%
Leasehold improvements 10%
</TABLE>
(g) INVESTMENT PROPERTIES
Investment properties are interests in land and buildings in
respect of which construction works and development have been
completed and which are intended to be held on long-term basis for
their investment potential.

As of April 30, 1998, investment properties are stated in the
balance sheet at their open market values on basis of professional
valuation carried out by CB Richard Ellis Limited and Prudential
Surveyors International Ltd., independent property valuers. In
prior years, investment properties were stated at historical cost.
Under accounting principles practiced in Hong Kong, investment
properties were adjusted to market value when the Company became a
public reporting entity. This change had no effect on the profit
and loss account, but did result in an increase to investment
properties offset by an increase within shareholders' equity.

F-9

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(g) INVESTMENT PROPERTIES (CONTINUED)

No amortization and depreciation is provided in respect of
investment properties because their unexpired term of underlying
land leases are over 20 years. Prior to 1995, these properties
were classified as land and buildings and HK$1,178,000 of
accumulated depreciation had previously been recorded.

Changes in the values of investment properties are dealt with as
movements in the investment properties revaluation reserve. If the
total of the attributable reserve is insufficient to cover a
deficit, on a portfolio basis, the excess of the deficit is
charged to the profit and loss account. Where a deficit has
previously been charged to the profit and loss account and a
revaluation surplus subsequently arises, this surplus is credited
to the profit and loss account to the extent of the deficit
previously charged.

Upon disposal of an investment property, the relevant surplus or
deficit of the investment property revaluation reserve realized in
respect of previous valuations is released to the profit and loss
account.

(h) DEFERRED OFFERING COSTS
In connection with the private and public offerings, the Company
incurred certain costs associated with these offerings. In
connection with the private offering of debt, these costs were
amortized as additional interest expenses during the year ended
April 30, 1998.

The costs associated with the public offering were offset against
the proceeds of the offering.

(i) ORGANIZATION COSTS
Organization costs comprise of professional fees paid to third
parties in connection with the organization of the Company.
Amortization is calculated over 10 years using straight line
basis.

(j) DEFERRED TAXATION
Provision for deferred taxation is calculated under the liability
method for all material differences to the extent that there is a
reasonable probability that these will be reversed within the
foreseeable future.

(k) OPERATING LEASES
Leases where substantially all the rewards and risks of ownership
of assets remain with the leasing company are accounted for as
operating leases. Rentals payable under operating leases are
recorded in operations on a straight line basis over the lease
term.

F-10

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l) CAPITALIZED LEASE OBLIGATIONS
Where assets are acquired under capitalized leases, the amounts
representing the outright purchase price of such assets are
included in fixed assets and the corresponding liabilities, net of
finance charges, are recorded as obligations under capitalized
lease obligations. Depreciation is provided on the cost of the
assets on a straight line basis over their estimated useful lives
as set out in note 2(f) above. Finance charges implicit in the
purchase payments are charged to operations over the periods of
the contracts so as to produce an approximately constant periodic
rate of charge on the remaining balances of the obligations for
each accounting period.

(m) RELATED COMPANY
Parties are considered to be related if one party has the ability
to control the other party or exercise significant influence over
the other party in making financial and operating decisions.

(n) REVENUE RECOGNITION
(i) Sales of goods
Sales are recognized when goods are delivered and title
passed to customers.

(ii) Others
Interest income is recognized on a time proportion basis.
Rental income relating to operating leases is recognized on
a straight line basis over the lease term.

(o) FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the
approximate rates of exchange on the dates of transactions.
Monetary assets and liabilities denominated in foreign currencies
are translated at approximate rates ruling at the balance sheet
date. Exchange differences are recorded within the statement of
operations.

Assets and liabilities of overseas subsidiaries are translated at
the approximate exchange rates ruling at the balance sheet date.
All exchange differences arising on the consolidation are recorded
within equity. Historically, foreign exchange transactions have
not been material to the financial statements.

For the purpose of these financial statements, the exchange rate
adopted for the presentations of financial information as of and
for the year ended April 30, 1998 has been made at HK$7.73 to
US$1.00.

(p) GOLD LOANS
Gold loan balances are translated at the gold price prevailing at
the close of business on the balance sheet date. Profits and
losses arising on translation are dealt with in the profit and
loss account.

F-11

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(q) EARNINGS PER SHARE
Earnings per share is based on net income attributable to
shareholders and the weighted average number of ordinary shares
outstanding during the year.

Fully diluted earnings per share is not shown because the impact
of any dilution is not material.

(r) USES OF ESTIMATES
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual amounts could differ from those
estimates.

3. OPERATING RISKS

(a) CONCENTRATIONS OF CREDIT RISKS

The Company derived revenues from the following major customers,
which accounted for over 10% of net revenues.

<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------
Customer 1996 1997 1998
-------- ---- ---- ----
<S> <C> <C> <C>

QVC Network Inc. 56% 69% 55%
Tocantins Minerals Mining &
Science Corp. - - 13%
</TABLE>

Accounts receivable related to the Company's major customers were
HK$16,476,000 as of April 30, 1998.

Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when
there are similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic or other conditions. The major
concentration of credit risk arises from the Company's
receivables. Even though the Company does have major customers,
it does not consider itself exposed to significant credit risk
with regards to collection of the related receivables. Historical
losses have not been significant.

F-12

<PAGE>

3. OPERATING RISKS (CONTINUED)

(b) COUNTRY RISKS

The Company may also be exposed to certain risks as a result of
its manufacturing operation being located in the PRC and its
investment properties in Hong Kong which are not typically
associated with companies operating in North America and Western
Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency
exchange. The Company's results may be adversely affected by
changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other
things. The Company's management does not believe these risks to
be significant. There can be no assurance, however, that changes
in political, social and other conditions will not result in any
adverse impact.

The Company maintains its cash balances and investments in time
deposits with various banks and financial institutions located in
Hong Kong. In common with local practice, such amounts are not
insured or otherwise protected should the financial institutions
be unable to meet their liabilities.
There has been no history of credit losses.

F-13

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY, PLANT AND EQUIPMENT

As of April 30
---------------------------------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Land and buildings
Cost 2,471 2,470 320
Accumulated depreciation (486) (576) (75)
----------- ----------- ----------

Net book value 1,985 1,894 245
----------- ----------- ----------
----------- ----------- ----------

Leasehold improvements
Cost 2,074 14,218 1,839
Accumulated depreciation (665) (865) (112)
----------- ----------- ----------

Net book value 1,409 13,353 1,727
----------- ----------- ----------
----------- ----------- ----------

Furniture, fixtures and equipments
Cost 3,803 6,231 806
Accumulated depreciation (3,137) (3,525) (456)
----------- ----------- ----------

Net book value 666 2,706 350
----------- ----------- ----------
----------- ----------- ----------

Plant and machineries
Cost 3,819 11,862 1,535
Accumulated depreciation (1,124) (1,471) (190)
----------- ----------- ----------

Net book value 2,695 10,391 1,345
----------- ----------- ----------
----------- ----------- ----------

Motor vehicles
Cost 1,670 2,101 272
Accumulated depreciation (106) (424) (55)
----------- ----------- ----------

Net book value 1,564 1,677 217
----------- ----------- ----------
----------- ----------- ----------

Total net property, plant and
equipment 8,319 30,021 3,884
----------- ----------- ----------
----------- ----------- ----------

</TABLE>

F-14

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

5. BANKING FACILITIES AND OTHER LOANS

The Company has various letters of credit under banking facilities
which aggregated HK$32,100,000 as of April 30, 1998. The Company had
HK$17,622,000 and HK$16,495,000 outstanding under its letters of credit
as of April 30, 1997 and 1998 respectively. These letters of credit
also collaterized the Company's gold loan discuss below. In addition,
the Company had HK$13,500,000 of cash overdraft protection under its
banking facilities as of April 30, 1998. The amount outstanding under
this arrangement aggregated HK$8,639,000 and HK$1,049,000 as of April
30, 1997 and 1998, respectively. Interest charges range from Hong Kong
Dollars prime plus 1% to 3%. (11% to 13% as of April 30, 1998) on these
loans. Under the Company's banking facilities arrangements, the Company
is required to maintain certain cash balances based on the amount of
cash overdraft protection given. These balances are reflected as
restricted cash in the accompanying financial statements.

The Company had outstanding loans to purchase 2,300 oz of gold as of
April 30, 1997 and 1998 with the related balances being HK$6,376,000
and HK$5,810,000 respectively. These loans are due within the next
year, however, have been historically renewed. These loans bear
interest at 3.30% to 3.60% as of April 30, 1998. These loans can be
repaid in cash at the current exchange rate of gold any time prior to
maturity. The Company adjusts the outstanding loan balance to the
current market rate of gold as of the balance sheet date. Due to
changing prices of gold, this adjustment has resulted in additional
income of HK$474,000 and HK$566,000 for the years ended April 30, 1997
and 1998 respectively. As the Company does not hedge for changes in the
future price of gold, the Company is exposed to certain market risks,
which may result from potential future increases in the price of gold.

The Company also had repaid all the unsecured loans from individuals of
HK$4,645,000 as of April 30, 1998.

The Company also had long-term mortgage loans which are related to the
Company's investment properties. These loans aggregated HK$15,217,000
and HK$13,847,000 as of April 30, 1997 and 1998 respectively. Interest
charges on these loans range from Hong Kong Dollars prime plus 1.5% to
2% (11.50% to 12.00% as of April 30, 1998).

On October 17, 1997, the Company completed the sale of promissory notes
amounting to HK$6,049,000. The proceeds from this private offering were
used primarily to pay for the cost of the Initial Public Offering.
These notes beared interest at 7% and note holders were partially
repaid from proceeds of the Initial Public Offering and received
156,500 shares of common stock upon the public offering. As of April
30, 1998, the Company had outstanding promissory notes amounting to
HK$2,184,000, which were repaid after year end. In connection with this
loan, origination costs, totalling HK$765,000 were expensed during the
year ended April 30, 1998.

F-15

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

5. BANKING FACILITIES AND OTHER LOANS (CONTINUED)

Expected maturities based on year end interest rate are as follows:

In Thousands In Thousands
------------ ------------
HK$ US$
<S> <C> <C>
1999 4,158 538
2000 3,054 395
2001 3,005 388
2002 3,011 390
2003 619 80
---------- ---------
13,847 1,791
---------- ---------
---------- ---------

</TABLE>

The Company's banking facilities are collaterized by investment
properties, restricted cash deposits and personal guarantees of certain
directors.

6. CAPITALIZED LEASE OBLIGATION

The Company leases certain equipment under agreements classified as
capital leases. Equipment under these leases has a cost of HK$1,785,000
and accumulated amortization of approximately HK$314,000 as of April
30, 1998. The following is a schedule of future minimum lease payments
under capital leases as of April 30, 1998.

(In Thousands) (In Thousands)
HK$ US$
<S> <C> <C>
Future minimum lease payments 1,610 208
Less: Amount representing interest (326) (42)
--------- ---------

Present value of net minimum lease payments 1,284 166
Less: Current portion (429) (55)
--------- ---------
855 111
--------- ---------
--------- ---------

</TABLE>

7. CONTINGENT LIABILITIES

As of April 30, 1997 and 1998, the Company had sold a receivable with
recourse amounting to HK$1,992,000 and HK$Nil respectively

F-16

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

8. SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM

As of April 15, 1998, LJI issued 1,460,000 shares of common stock to
the public in the Initial Public Offering and had raised HK$52,056,000.

The merger with the Deen Technology, Corp (Deen), which was committed
to in December 1996 was completed by the issue of 142,946 shares of its
common stock at nil consideration on October 6, 1997, with the Company
being the legal surviving entity. Deen had no significant assets or
liabilities, but did have a large number of U.S. shareholders.

As agreed with the US$782,500 promissory note holders in respect of the
bridge loan financing before the Initial Public Offering, the Company
issued 156,500 shares of common stock to note holders on the effective
date of the Initial Public Offering, without any additional
consideration.

The Representative of the Initial Public Offering (Representative), has
exercised their right to purchase 219,000 shares of common stock and
219,000 redeemable common stock purchase warrant ("purchase warrants"
or "warrants"). The Company received the net over-allotment shares
proceeds of HK$7,364,000 subsequent to the year end.

In the Initial Public Offering, the Company also issued 1,460,000
warrants. Including the 219,000 over-allotment warrants discussed
above, each purchase warrant entitles the holders to purchase one share
of common stock at a price of US$5.75 per share through April 15, 2003.
Prior to year end, the Company has received all proceeds from the issue
of 1,679,000 warrants totalling HK$1,622,000 which was recorded in the
Company's warrant reserve account. The Representative also received
warrants to purchase 146,000 shares of common stock at US$8.25. These
warrants are exercisable from April 15, 1998 and expire on April 14,
2003.

9. RELATED PARTY TRANSACTIONS

(a) Names and relationship of related parties

Existing relationships with the Company
---------------------------------------
<S> <C>
Yih Yu Chuan Director and major shareholder of LJI
Gemological Institute of America, Common directors and major shareholders
Hong Kong Limited
Italon Limited Common directors and major shareholders
Lorenzo Consultant & Investment (China) Common directors and major shareholders
Limited
Hong Kong Brasil Lapidary Limited Common director and major shareholder

</TABLE>

F-17

<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

9. RELATED PARTY TRANSACTIONS (CONTINUED)

(b) Summary of related party transactions

As of April 30
------------------------------------------------------
(In Thousands)
Note 1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C> <C>
Due from related parties:
Gemological Institute of America,
Hong Kong Limited (i) 1,776 2,418 313
Lorenzo Consultant & Investment
(China) Limited (i) 19 23 3
Hong Kong Brasil Lapidary Limited (i) - 214 27
---------- ---------- ---------
1,795 2,655 343
---------- ---------- ---------
---------- ---------- ---------
Due to related party:
Yih Yu Chuan - Director (ii) - 48 6
---------- ---------- ---------
---------- ---------- ---------

</TABLE>

Year Ended April 30
----------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Sales:
Hong Kong Brasil Lapidary Limited - - 254 33
Yih Yu Chuan - 197 - -
---------- --------- ------------ ---------
- 197 254 33
---------- --------- ------------ ---------
---------- --------- ------------ ---------

Purchases:
Italon Limited - 861 - -
Yih Yu Chuan (iii) 1,071 1,862 - -
---------- --------- ------------ ---------
1,071 2,723 - -
---------- --------- ------------ ---------
---------- --------- ------------ ---------

Sub-contracting charge:
Italon Limited (iv) 3,122 1,394 - -
---------- --------- ------------ ---------
---------- --------- ------------ ---------

Rental income:
Gemological Institute of
America, Hong Kong Limited 300 300 275 36
Italon Limited 300 275 - -
---------- --------- ------------ ---------
600 575 275 36
---------- --------- ------------ ---------
---------- --------- ------------ ---------

Gain on sale of building:
Yih Yu Chuan (v) - - 2,904 376
---------- --------- ------------ ---------
---------- --------- ------------ ---------

</TABLE>

F-18

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

10. RELATED PARTY TRANSACTIONS (CONTINUED)

(i) The amounts due from related parties represent unsecured
advances which are interest free and repayable on demand.

(ii) The amount due to related party represents unsecured
advances which is interest free and repayable on demand.

(iii) Prior to the year ended April 30, 1997, the Company had
purchased gold from Yih Yu Chuan at a fixed price of
HK$93/gram. During the year, such arrangement has been
terminated.

(iv) The Company subcontracted with Italon for the manufacture
of the Company's jewelry. During the year ended April 30,
1997, the Company completed construction of its
manufacturing plant in the PRC and subcontracting to Italon
has been discontinued.

(v) During the year, Yih Yu Chuan purchased for cash an
investment property from the Company at appraised value.
The Company recognized a gain in this sale of HK$2,904,000.

10. OPERATING LEASES COMMITMENTS

As of April 30, 1998, the Company had commitments under non-cancellable
operating leases in respect of land and buildings of HK$2,540,000 which
expires in 1999. Total lease expense for the years ended April 30,
1996, 1997 and 1998 was HK$356,000, HK$490,000 and HK$1,398,000
respectively.

11. PENSION COSTS

The Company operates a defined contribution retirement plan (Plan)
which is optional for all qualified employees. The assets of the Plan
are held separately from those of the Company in a provident fund
managed by an independent trustee. The pension cost charge represents
contributions payable to the fund by the Company at rates specified in
the rules of the Plan. Where employees leave the Plan prior to vesting
fully in the contribution payable by the Company is reduced by the
amount of forfeited contribution.

The pension expense for the years ended April 30, 1996, 1997 and 1998
was HK$105,000, HK$148,000 and HK$248,000 respectively. The amount of
forfeitures for the years ended April 30, 1996, 1997 and 1998 was
HK$22,000, HK$14,000 and HK$16,000 respectively.

F-19

<PAGE>

LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES

Reconciliation to the expected statutory tax rate in Hong Kong of
16% (1997 and 1996: 16.5%) is as follows:

1996 1997 1998
---- ---- ----
% % %
<S> <C> <C> <C>
Statutory rate 16.5 16.5 16.0
Tax effect of net operating losses (7.4) - 1.0
Non taxable PRC profit (2.9) (3.0) (8.8)
Others 1.4 (1.2) 0.4
-------- --------- -----------
Effective rate 7.6 12.3 8.6
-------- --------- -----------
-------- --------- -----------

</TABLE>

Income tax expense is comprised of the following:

Year Ended April 30
------------------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Current taxes 620 2,210 2,120 274
Deferred taxes - - - -
----------- ----------- ---------- ----------
Income tax expense 620 2,210 2,120 274
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------

</TABLE>

The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which it is
domiciled and operates.

LJI is incorporated under the International Business Companies Act of
the British Virgin Islands and, accordingly, is exempted from payment
of the British Virgin Islands income tax. The Hong Kong subsidiaries
are subject to Hong Kong profits tax at a rate of 16% (1997 and 1996 :
16.5%).

PRC subsidiaries are registered to qualify as Foreign Investment
Enterprises in the PRC and are eligible for certain tax holidays and
concessions. Accordingly, certain of the PRC subsidiaries were exempted
from PRC income tax for two years starting from their first profit
making years (which has not been occurred yet), followed by a 50%
reduction of tax for next three years. These subsidiaries have
sustained losses for the PRC income tax purpose. As a result, the
Company has not recorded any PRC income tax expense. PRC income tax in
the future will be calculated at the applicable rates relevant to the
PRC subsidiaries which currently are 15%.

Deferred taxes comprise of the excess of tax depreciation allowances
over accounting depreciation expenses. The deferred tax liability as of
April 30, 1997 and 1998 was not significant.

F-20

<PAGE>

LJ INTERNATIONAL INC

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

13. REPORT ON SEGMENT INFORMATION

The Company has operations in the following geographical area:
<TABLE>
<CAPTION>

Year Ended April 30
--------------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
HK$ HK$ HK$ US$
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Sales to customers outside the Company
- United States of America & Canada 73,941 80,481 111,274 14,395
- Hong Kong 1,991 919 2,248 291
- Europe and other countries 865 1,101 5,667 733
- PRC 143 570 58 7
- Japan 10,378 9,187 4,952 641
---------- --------- ---------- ----------
87,318 92,258 124,199 16,067
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Segment profit
- Hong Kong 13,184 19,583 15,415 1,994
- PRC 24 137 14,005 1,812
Interest income (expenses), net (5,693) (3,999) (6,964) (901)
---------- --------- ---------- ----------
Net income 7,515 15,721 22,456 2,905
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>

As of April 30
----------------------------------------------------
(In Thousands)
1997 1998 1998
HK$ HK$ US$
--------- ---------- ---------
<S> <C> <C> <C>
Segment assets
- Hong Kong 57,445 97,626 12,629
- PRC 25,434 56,990 7,373
--------- ---------- ---------
82,879 154,616 20,002
--------- ---------- ---------
--------- ---------- ---------
</TABLE>

The Company operates in two segments: the manufacture of jewelry and
holding of investment properties. Information regarding these segments
is as follows:

<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
HK$ HK$ HK$ US$
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
- Manufacture of jewelry 87,318 92,258 124,199 16,067
- Holding of investment properties 1,824 1,280 1,273 165
---------- ----------- ----------- ---------
89,142 93,538 125,472 16,232
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------

Segment profit
- Manufacture of jewelry 5,800 14,570 18,394 2,379
- Holding of investment properties 1,715 1,151 4,062 526
---------- ----------- ----------- ---------
7,515 15,721 22,456 2,905
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------
</TABLE>
F-21

<PAGE>

LJ INTERNATIONAL INC

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

13. REPORT ON SEGMENT INFORMATION (CONTINUED)

All of the Company's depreciation expense and capital expenditures
during the three years ended April 30, 1998 relate to the manufacture
of jewelry.

<TABLE>
<CAPTION>
As of April 30
-----------------------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Segment assets
- Manufacture of jewelry 61,224 126,398 16,351
- Holding of investment properties 21,580 28,150 3,642
- Unallocated - goodwill 75 68 9
---------- ----------- ------------
82,879 154,616 20,002
---------- ----------- ------------
---------- ----------- ------------
</TABLE>

14. SUBSEQUENT EVENTS

Subsequent to the Initial Public Offering of 1,460,000 shares of common
stock on April 15, 1998, an 219,000 additional shares of common stock
were issued on June 1, 1998 to cover the over-allotment. As of the date
of this report, the Company totally has 6,365,646 shares of common
stock.

On June 1, 1998, the Board of Directors adopted and approved the 1998
Stock Compensation Plan (the "1998 Plan"). The 1998 Plan provides that
incentive stock options, which are within the meaning of Section 422 of
the United States Internal Revenue Code of 1986, as amended (the
"Code"), and/or nonqualified stock options may be granted to certain
officers, directors, employees and advisors of the Company or its
subsidiaries, if any, selected by the Compensation Committee. Approval
of the Plan is subject to shareholder approval. If approved a total of
2,000,000 shares of Common Stock will be authorized and reserved for
issuance under the 1998 Plan, subject to adjustment to reflect changes
in the Company's capitalization in the case of a stock split, stock
dividend or similar event. The 1998 Plan shall be administered by the
full Board of Directors or by a Compensation Committee ("Committee")
appointed by the Board of Directors, which Committee shall consist
solely of not less than two non-employee Directors. All options must be
granted within ten years from the date the 1998 Plan is adopted. Each
option granted shall in no event be exercisable either in whole or in
part after the expiration of ten years from the date grant; provided,
however, if an incentive option is granted to a 10% Shareholder, such
incentive option shall not be exercisable more than five years from the
date of grant thereof. The exercise price for any incentive option must
be at least equal to the fair market value of the shares covered
thereby as of the date of grant of such option. Upon the exercise of
the option, the exercise price thereof must be paid in full either in
cash, share of stock of the Company or a combination thereof.

As of the date of this report, the Company has not granted any options
under the 1998 Plan.

F-22
<PAGE>

LJ INTERNATIONAL INC

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES

The Company's financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) as practiced in Hong
Kong (HK GAAP), which differ in certain significant respects from GAAP,
including certain accounting interpretations of the Securities and
Exchange Commission (SEC) as practiced in the United States (US GAAP).
The significant differences relate principally to the following items
and the adjustments necessary to restate operating income and
shareholders' equity in accordance with US GAAP are shown in the tables
set out below.

(a) BUSINESS COMBINATIONS
Under HK GAAP, the reorganization of companies under common
control involving the acquisition by the merger of LJI and Lorenzo
was accounted for by the purchase method of accounting. The
consideration given by the Company was recorded at fair value and
the excess over the fair value of net assets acquired was treated
as goodwill. The accompanying financial statements have been
presented on a consolidated basis, which effectively reflect this
reorganization as of April 30, 1994, even though the merger
occurred on May 6, 1997. Under US GAAP this would be recorded as a
reorganization of companies under common control similar to a
pooling of interest. The effect of this difference is that no
goodwill would be recorded on such combination.

(b) SHARE CAPITAL TRANSACTIONS
The Company completed a bridge loan financing on October 17, 1997,
where it raised HK$6,049,000 (US$782,500). As of April 30, 1998,
there still had an outstanding balance amounting to HK$2,280,000
(principal plus accrued interest) which had been repaid in the
subsequent month after the year end. As agreed, the Company issued
156,500 shares of its unregistered common stock at no additional
cost to the note holders after the Company completed its public
offering on April 15, 1998. Under US GAAP the Company is required
to fair value such shares. The value associated with these shares
is HK$6,049,000 based on the price associated with the offering,
which has been amortized as an additional interest expense during
the year.

As of April 30, 1998, the Company did not have a common stock
option plan nor any common stock options outstanding. To the
extent the Company grants common stock options, common stock or
other equity instrument to employees, it will be required under US
GAAP to record compensation expense for any difference between the
price at which the equity instrument is granted and then current
market price of the Company's trading common stock. It will
further be required to disclose in the footnotes to the financial
statements certain fair value information and proforma effects of
such issuances. Transaction in equity instruments with
non-employees for goods and services must be accounted for at fair
value as specified under US GAAP.

In connection with the public offering, the Company paid the
Representative HK$835,000 (US$108,000) for future financial
consulting. Under HK GAAP such amount was offset against the
proceeds of the offering. Under US GAAP such amount would be
deferred and recognized as an expense over the period the services
are expected to be performed on an accelerated basis over the next
three years. No expense would be recorded in 1998 as the offering
closed near year-end.

F-23
<PAGE>

LJ INTERNATIONAL INC

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

(c) CAPITALIZED DEFERRED COSTS
During the year, the Company merged with Deen. Approximately
HK$640,000 and HK$193,000 of costs were incurred in connection
with the merger for each of the years ended April 30, 1997 and
1998 respectively. Under HK GAAP these costs have been capitalised
as organization costs and will be amortized over ten years. As
Deen has no significant assets or substantive operations, other
than a large shareholder base, these costs, under US GAAP, would
be expensed as incurred.

The Company also has incurred certain indirect costs paid to
current directors associated with its public offering. Under HK
GAAP, these costs which totaled HK$120,000 and HK$589,000 for each
of the years ended April 30, 1997 and 1998 have been deferred as
offering costs and offset against share premium upon completion of
the public offering. In addition, during the year, the Company has
incurred indirect costs amounting to HK$116,000 with a consultant
associated with its public offering. Under US GAAP these amounts
would be expensed as incurred.

(d) EARNINGS PER SHARE
Under HK GAAP, basic earnings per share is based on the weighted
average number of common shares on issue during each period. Fully
diluted weighted average number of common shares are calculated on
a time weighted basis and operating income is adjusted to include
the assumed income, net of tax, from placing the proceeds from the
exercise of outstanding share options.

Under US GAAP, earnings per share is presented in accordance with
the provisions of Statement of Financial Accounting Standards No.,
128, EARNINGS PER SHARE (SFAS 128). SFAS 128 replaced the
presentation of primary and fully diluted earnings per share
(EPS), with a presentation of basic EPS and diluted EPS. Under
SFAS 128, basic EPS excludes dilution for common stock equivalents
and is computed by dividing income or loss available to common
shareholders by the weighted average number common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock. Shares issued in
connection with Deen merger, however, are reflected as outstanding
for all periods as they were issued for nominal consideration. In
accordance with SFAS 128 prior periods share have been restated in
the US GAAP reconciliation table.

Under US GAAP, fully diluted earnings per share for the year ended
April 30, 1998 is not shown as common stock equivalents were
anti-dilutive.

F-24
<PAGE>

LJ INTERNATIONAL INC

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments are determined
at discrete points in time based on relevant market information.
These estimated involve uncertainties and cannot be determined
with precision. Under US GAAP the estimated fair value are to be
disclosed if they are materially different from the underlying
historical cost basis. The Company has the following financial
instruments and investments, where the fair value may be different
from historical costs.

i) Investment properties - The fair value of the investment
properties held by the Company as of April 30, 1998 is
estimated to be HK$28,150,000 on the market value basis. The
market valuations are generally performed by third parties at
varing dates during the year and adjusted internally by
management to year-end amounts.

ii) Related party transactions - The Company has receivables from
affiliated companies, which are non-interest bearing and
unsecured. The fair value of these financial instruments may
be different from the historical cost basis, but due to the
related party nature of the transaction, this difference
cannot be estimated. (As discussed below, there are other
differences between US GAAP and HK GAAP in the treatment and
classification of these related party advances).

iii) Cash and cash equivalents, trade receivables and trade
payables - The carrying amounts approximate fair value because
of the short maturity of those instruments.

(f) INVESTMENT PROPERTIES
Under HK GAAP investment properties are included in the balance
sheet at their open market values, based on a year end valuation.
Under US GAAP investment properties are recorded at their
historical costs. This would have reduced the carrying values by
HK$7,465,000 as of April 30, 1998 with no related income tax
effect. Under HK GAAP investment properties have not been
depreciated since 1995, at which time accumulated depreciation was
HK$1,178,000. Under US GAAP depreciation would have continued to
be recorded over an estimated useful life of 40 years based
historical costs. This would have increased depreciation expense
for the years ended 1996, 1997 and 1998 by HK$572,000, HK$572,000
and HK$547,000 (US$71,000) with no related income tax effect.

F-25

<PAGE>

LJ INTERNATIONAL INC

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

(g) RELATED PARTY TRANSACTIONS
Under US GAAP significant related party advances are recorded as a
reduction to equity as opposed to an asset.

In October 1997, the Company sold a building to its major
shareholder and recognized a gain of HK$2,904,000. Under US GAAP,
such gain would be recorded as a capital contribution.
Accordingly, there would be no effect on the shareholders' equity
under US GAAP.

(h) DEFERRED TAXES
Under HK GAAP provision for deferred taxes is calculated under the
liability method for all material differences to the extent that
there is a reasonable probability that these will be reversed
within the foreseeable future. Under US GAAP provision for
deferred taxes requires the recognition of deferred tax assets and
liabilities for the estimated future tax effects attributable to
temporary differences without regard to the probability of future
reversal. As the temporary differences are considered as not
material, no provision for deferred taxes has been made under the
US GAAP.

(i) SHARE PREMIUM
The Company created a share premium of HK$41,597,000 following the
public offering of 1,460,000 shares of common stocks. Under US
GAAP these amounts would be termed additional paid-in capital,
however, no adjustment would be required to total shareholders'
equity.

F-26

<PAGE>

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

The following table summarized the effect on net income of differences
between HK GAAP and US GAAP.

Year Ended April 30
--------------------------------------------
(In Thousands)
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Net income as reported under HK GAAP 7,515 15,721 22,456 2,905
US GAAP material adjustments:
- Depreciation on investment properties (572) (572) (547) (71)
- Capitalized deferred costs - (760) (898) (116)
- Amortization of costs for shares issuable
to note holders - - (6,049) (783)
- Gain on disposal of an investment property
to a related party - - (2,904) (376)
- Additional gain on disposal of an
investment property - - 76 10
- Amortization of Deen Merger costs - - 64 8
- Amortization of goodwill - - 7 1
- Income tax effects - - - -
----- ------ ------ -----
Net income under US GAAP 6,943 14,389 12,205 1,578
----- ------ ------ -----
----- ------ ------ -----

Proforma earnings per share under
US GAAP
- Basic 1.53 3.18 2.65 0.34
----- ------ ------ -----
----- ------ ------ -----

Weighted average number of shares outstanding
(thousand) under HK GAAP 4,387 4,387 4,539 4,539

Affected weighted average number of shares
Calculation - - 62 62

Shares (thousand) for Deen Merger 143 143 - -
----- ------ ------ -----

Weighted average number of shares outstanding
(thousand) under US GAAP 4,530 4,530 4,601 4,601
----- ------ ------ -----
----- ------ ------ -----

</TABLE>

F-27

<PAGE>

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

The following table summarized the effect on shareholders' equity of the
differences between HK GAAP and US GAAP.

As of April 30
---------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Shareholders' equity as reported
under HK GAAP 16,981 90,257 11,676
Cumulative effect of depreciation
on investment properties (1,716) (2,263) (293)
Capitalized deferred costs (760) (769) (99)
Reduction for related company advance (1,795) (2,655) (343)
Increase for future financial consulting
paid to the Representative in the
public offering - 835 108
Reduction for goodwill recorded
on the merger of LJI and Lorenzo (75) (68) (9)
Additional gain on disposal of an
investment property - 76 10
Amortization of costs for shares
issuable to note holders - - -
Surplus arising on revaluation of
investment properties - (7,465) (966)
------ ------ ------
Shareholders' equity under US GAAP 12,635 77,948 10,084
------ ------ ------
------ ------ ------

</TABLE>

F-28

<PAGE>

15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS

Statement of Financial Accounting Standards 130, reporting Comprehensive
Income" and Statement of Financial Accounting Standards 131 disclosures
About Segments of an Enterprise and Related Information". Statement 130
establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures,
Statement 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income
be reported in a financial statement that displays with the same
prominence as other financial statements. Statement 131 supersedes
Statement of Financial Accounting Standards 14 financial Reporting for
Segments of a Business Enterprise". Statement 131 establishes standards
on the way that public companies report financial information about
operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. Statement 131 defines operating segments as components of a
company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.

Statements 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, the standards may have on the future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these
standards.

F-29

<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Enforceability of Civil Liabilities and
Certain Foreign Issuer Considerations . . . . . . . . . . . . . 3
Currency Translations. . . . . . . . . . . . . . . . . . . . . . 4
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . 15
Nature of Trading Market . . . . . . . . . . . . . . . . . . . . 15
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . 16
Selected Consolidated Financial Data . . . . . . . . . . . . . . 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 19
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . 38
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . 39
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . 40
Description of Securities. . . . . . . . . . . . . . . . . . . . 41
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . 45
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . 48
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 48
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Additional Information . . . . . . . . . . . . . . . . . . . . . 48
Index to Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>

1,679,000 COMMON STOCK
WARRANTS

AND

1,679,000 SHARES OF
COMMON STOCK
UPON EXERCISE OF THE
WARRANTS

LJ INTERNATIONAL INC.

----------
PROSPECTUS
----------

October 13, 1998